<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report:
October 28, 1997
SALOMON INC
(Exact name of registrant as specified in its charter)
Delaware I-4346 22-1660266
(State of Incorporation) (Commission File No.) (I.R.S. Employer
Identification No.)
Seven World Trade Center, New York, New York 10048
(Address of Principal Executive Offices) (Zip Code)
(212) 783-7000
(Registrant's Telephone No.)
<PAGE> 2
Item 5. Other Events
On September 25, 1997, Salomon Inc (the "Registrant") and Travelers
Group Inc. ("Travelers") announced that they had entered into an Agreement and
Plan of Merger dated as of September 24, 1997 (the "Merger Agreement"),
pursuant to which a wholly owned subsidiary of Travelers will merge (the
"Merger") with and into the Registrant. Under the terms of the Merger
Agreement, each share of the common stock, par value $1.00 per share, of the
Registrant will be exchanged for 1.13 shares of the common stock, per value
$.01 per share, of Travelers, each share of preferred stock of the Registrant
will be converted into a share of a substantially identical series of converted
into a share of a substantially identical series of preferred stock of
Travelers. The transaction will be a tax-free exchange and will be accounted
for on a "pooling of interests" basis. The Merger, which is expected to be
completed in late 1997, is subject to customary closing conditions, including
certain regulatory approvals (including under the Hart-Scott-Rodino Antitrust
Improvements Act) and the approval of the Registrant's stockholders. After the
Merger, the Registrant and Smith Barney Holdings Inc. ("Smith Barney") will
merge.
Travelers' amended Annual Report on Form 10-K/A-2 for the year ended
December 31, 1996, which includes the consolidated financial statements and
schedules of Travelers and its subsidiaries as of December 31, 1996 and 1995
and for each of the three years in the period ended December 31, 1996, is being
filed as Exhibit 99 to this Form 8-K and is incorporated by reference herein.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
Exhibits:
23 Consent of KPMG Peat Marwick LLP
99 Annual Report on Form 10-K/A-2 for the year ended
December 31, 1996 of Travelers Group Inc, dated
October 24, 1997.
<PAGE> 3
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Salomon Inc
(Registrant)
Date: October 28, 1997 By: /s/ Jerome H. Bailey
---------------------------
Title: Chief Financial Officer
<PAGE> 4
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
23 Consent of KPMG Peat Marwick LLP
99 Annual Report on Form 10-K/A-2 for the year ended
December 31, 1996 of Travelers Group Inc, dated
October 24, 1997.
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Travelers Group Inc.:
We consent to the incorporation by reference in the registration statement on
Form S-3 of Salomon Inc, SSBH Capital I, SSBH Capital II, SSBH Capital III and
SSBH Capital IV of our reports dated January 17, 1997, with respect to the
consolidated financial statements and related financial statement schedules
incorporated by reference or included in the December 31, 1996 annual report on
Form 10-K, as amended by Form 10-K/A-2, of Travelers Group Inc., which reports
appear in the Form 8-K of Salomon Inc dated October 28, 1997, and to the
reference to our firm under the heading "Experts" in the registration statement.
/s/ KPMG Peat Marwick LLP
New York, New York
October 28, 1997
<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM 10-K/A-2
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1996
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to ______
----------------
Commission file number 1-9924
----------------
TRAVELERS GROUP INC.
(Exact name of registrant as specified in its charter)
Delaware 52-1568099
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
388 Greenwich Street, New York, New York 10013
(Address of principal executive offices) (Zip Code)
(212) 816-8000
(Registrant's telephone number, including area code)
----------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, par value New York Stock Exchange and
$ .01 per share Pacific Stock Exchange
Depositary Shares, each New York Stock Exchange
representing 1/10 of a share of
8.125% Cumulative Preferred Stock,
Series A
Depositary Shares, each New York Stock Exchange
representing 1/2 of a share of
9.25% Preferred Stock, Series D
7 3/4% Notes Due June 15, 1999 New York Stock Exchange
1998 Warrants to Purchase Common Stock New York Stock Exchange
<PAGE> 2
8% Trust Preferred Securities of New York Stock Exchange
Subsidiary Trust (and registrant's
guaranty with respect thereto)
7 3/4% Trust Preferred Securities of New York Stock Exchange
Subsidiary Trust (and registrant's
guaranty with respect thereto)
7 5/8% Trust Preferred Securities of New York Stock Exchange
Subsidiary Trust (and registrant's
guaranty with respect thereto)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of March 5, 1997 was approximately $34.2 billion.
As of March 5, 1997, 641,379,081 shares of the registrant's Common Stock, par
value $.01 per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's Annual Report to Stockholders for the
fiscal year ended December 31, 1996 are incorporated by reference into Part II
of this Form 10-K/A-2.
Certain portions of the registrant's Proxy Statement for the 1997 Annual Meeting
of Stockholders to be held on April 23, 1997 are incorporated by reference into
Part III of this Form 10-K/A-2.
<PAGE> 3
EXPLANATORY NOTE
This Form 10-K/A-2 is being filed to revise the sections entitled
"Property & Casualty Insurance Services -- Reserves" and "Property & Casualty
Insurance Services -- Environmental, Asbestos and Cumulative Injury Claims" in
Item 1 and to make certain revisions to the information incorporated in Items 7
and 8. To reflect those changes, we have revised Exhibit 13.01, which is being
refiled in its entirety, and have amended Item 14 accordingly. There have been
no other changes to the text of the Form 10-K, which speaks as of the date of
its original filing.
PART I
------
Item 1. BUSINESS.
THE COMPANY
Travelers Group Inc. (the "Company") is a financial services holding
company engaged, through its subsidiaries, principally in four business
segments: (i) Investment Services; (ii) Consumer Finance Services; (iii)
Property & Casualty Insurance Services; and (iv) Life Insurance Services.
On April 2, 1996, Travelers Property Casualty Corp. (formerly
Travelers/Aetna Property Casualty Corp.) ("TAP"), an indirect majority-owned
subsidiary of the Company that was formed in January 1996 to hold the property
and casualty insurance subsidiaries (collectively, "Travelers P&C") of The
Travelers Insurance Group Inc. ("TIGI"), purchased from Aetna Services Inc.
(formerly Aetna Life and Casualty Company) ("Aetna") all of the outstanding
capital stock of The Aetna Casualty and Surety Company ("Aetna Casualty") and
The Standard Fire Insurance Company ("Standard Fire"), Aetna's property and
casualty insurance subsidiaries (collectively, "Aetna P&C"), for approximately
$4.16 billion in cash. The acquisition of Aetna P&C (the "Acquisition") was
treated as a purchase and, accordingly, the Company's consolidated financial
statements include the results of Aetna P&C's operations only from the date of
the Acquisition. As part of the financing of the Acquisition, TAP sold
approximately 33 million shares of its Class A Common Stock (representing
approximately 9% of its outstanding common stock at that time) to four private
investors, including Aetna. TIGI acquired approximately 328 million shares of
TAP's Class B Common Stock in exchange for its contribution of the outstanding
capital stock of The Travelers Indemnity Company ("Travelers Indemnity") and a
capital contribution of approximately $1.14 billion. In April 1996, TAP sold in
a public offering approximately 39 million shares of its Class A Common Stock
(representing approximately 9.75% of its outstanding common stock at that time).
The Company indirectly owns approximately 82% of TAP's outstanding common stock.
For additional information about the Acquisition, the public offering and other
related transactions, see Note 2 of Notes to Consolidated Financial Statements.
During 1996, the Company continued and expanded the marketing of its
financial products through the various distribution channels offered by its
subsidiaries, primarily the independent agents of Primerica Financial Services
(the "PFS sales force") and the Financial Consultants of Smith Barney Inc. The
PFS sales force, which primarily sells life insurance and mutual funds, now also
sells personal lines property-casualty insurance offered by Travelers Indemnity,
a subsidiary of TAP. Through this program, over 6,300 members of the PFS sales
force are now licensed to sell automobile and homeowners insurance products
under the Secure-SM-name. The program, which began in 1994 and continues to
experience growth in applications and policies, is now available in 37 states.
See "Property & Casualty Insurance
1
<PAGE> 4
Services -- Personal Lines." The PFS sales force has become the largest
distributor of The Concert Series-SM-, a group of mutual funds offered by Smith
Barney, with 1996 sales of approximately $458 million. See "Life Insurance
Services -- Primerica Financial Services." The $.M.A.R.T.-SM- and $.A.F.E.-SM-
loan programs, under which members of the PFS sales force solicit applications
for loans underwritten by Commercial Credit Company ("CCC"), generated net
receivables of over $1.5 billion at December 31, 1996. See "Consumer Finance
Services -- Consumer Finance." Qualified Smith Barney Financial Consultants
offer individual products, primarily variable annuities, of Travelers Life and
Annuity. These products include, among others, Vintage Life-R- and Vintage
Annuity-SM-, single premium variable universal life products, and Travelers
Target Maturity-R-, a market value adjusted fixed annuity. The Company has also
created a subsidiary to facilitate the cross-marketing of the Company's products
among its subsidiaries and to offer a bundled group of those products for sale
to employees of other companies through a directed sales effort.
The periodic reports of CCC, Smith Barney Holdings Inc. ("SB
Holdings"), TAP, The Travelers Insurance Company and The Travelers Life and
Annuity Company, subsidiaries of the Company that make filings pursuant to the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), provide
additional business and financial information concerning those companies and
their consolidated subsidiaries.
The principal executive offices of the Company are located at 388
Greenwich Street, New York, New York 10013; telephone number 212-816-8000.
This discussion of the Company's business is organized as follows:
(i) a description of each of the Company's four business segments; (ii) a
description of the Corporate and Other Operations segment; and (iii) certain
other information. A glossary of insurance terms is included beginning on page
70.
INVESTMENT SERVICES
The Company's Investment Services segment includes the operations of
SB Holdings and its subsidiaries. As used herein, unless the context otherwise
requires, "Smith Barney" refers to SB Holdings and its consolidated
subsidiaries.
Smith Barney
SB Holdings provides investment banking, asset management, brokerage
and other financial services through its subsidiaries. Its principal operating
subsidiary is Smith Barney Inc. ("SBI"), an investment banking, securities
trading and brokerage firm that traces its origins back to 1873.
Smith Barney operates through approximately 450 offices throughout the
United States, and 17 offices in 15 foreign countries. With approximately 10,400
Financial
2
<PAGE> 5
Consultants, the Company believes that Smith Barney is currently the second
largest domestic brokerage firm in the United States.
Investment Banking and Securities Brokerage
Smith Barney is an investment banking and securities trading and
brokerage firm serving United States and foreign corporations, governments and
institutional and individual investors. Its business includes securities,
options and commodities brokerage for domestic and international institutional
and individual clients; underwriting and distribution of securities; arranging
for the private placement of securities; assisting in mergers and acquisitions
and providing other financial advisory services; market making and trading in
corporate debt and equity, United States government and agency, mortgage-related
and municipal securities and foreign exchange, futures and forward contracts;
customer financing activities; securities lending activities; investment
management and advisory services; securities research; and other related
activities.
Smith Barney's investment banking services include the underwriting
of debt and equity issues for United States and foreign corporations and for
state, local and other governmental and government-sponsored authorities. Smith
Barney frequently acts as managing underwriter in corporate and public
securities offerings. Smith Barney also acts as a private placement agent for
various clients, and as such helps to place securities for clients with large
institutions and other qualified investors. Smith Barney also provides financial
advice to investment banking clients on a wide variety of transactions including
mergers and acquisitions, exchanges of securities and corporate restructurings.
Smith Barney executes securities brokerage transactions on all major
United States securities exchanges and distributes a wide variety of financial
products. It makes inter-dealer markets and trades as principal in corporate
debt and equity securities, primarily of United States corporate issuers, United
States and foreign government, and agency securities, mortgage-related
securities, whole loans, municipal and other tax-exempt securities, commercial
paper and other money market instruments as well as emerging market debt
securities. The firm carries inventories of securities to facilitate sales to
customers and other dealers and with a view to realizing trading gains. SBI is
one of the leading dealers in municipal securities and is a "Primary Dealer" in
United States government securities, as designated by the Federal Reserve Bank
of New York. Its daily trading inventory positions in United States government
and agency securities are financed largely through the use of repurchase
agreements pursuant to which Smith Barney sells the securities and
simultaneously agrees to repurchase them at a future date. Smith Barney also
acts as an intermediary between borrowers and lenders of short-term funds
utilizing repurchase and reverse repurchase agreements. Smith Barney uses
derivative financial instruments to facilitate customer transactions and to
manage exposure to interest rate, currency and market risk. In addition, for its
own account Smith Barney engages in a limited manner in certain arbitrage
activities, which primarily seek to benefit from temporary price discrepancies
that occur with respect to
3
<PAGE> 6
related securities or to the same security on different markets. Smith Barney
also engages in the borrowing and lending of securities. The Smith Barney
network of Financial Consultants also sells Travelers Life and Annuity
individual products, primarily variable annuities. See "Life Insurance Services
- -- Travelers Life and Annuity."
Smith Barney executes transactions in large blocks of
exchange-listed stocks, usually with institutional investors, and often acts as
principal to facilitate these transactions. It makes markets, buying and selling
as principal, in common stocks, convertible preferred stocks, warrants and other
securities traded on the NASDAQ system or otherwise in the over-the-counter
market. Smith Barney also maintains trading positions in equity options,
convertible securities, debt options, foreign exchange and commodities
instruments. It executes significant client transactions in both listed and
unlisted options and in foreign exchange, and often acts as principal to
facilitate these transactions. Smith Barney also sells various types of
structured securities on both a principal and an agency basis. The firm's
securities trading and investment activities involve significant risk in that
the values of positions carried in its trading and investment accounts are
subject to market fluctuations. Smith Barney engages in a variety of financial
techniques designed to manage this risk.
Customer Financing
Customers' securities transactions are executed on either a cash or
margin basis. Federal regulations prescribe the minimum original margin that
must be deposited by securities purchasers, and exchange regulations prescribe
the minimum margins that must be maintained by customers. Smith Barney imposes
margin maintenance requirements that are equal to or exceed those required by
exchange regulations. Such requirements are intended to reduce the risk assumed
by Smith Barney that a market decline will reduce the value of a customer's
collateral below the amount of the customer's indebtedness before the collateral
can be sold. Substantially all transactions in commodities futures contracts are
on margin subject to individual exchange regulations. Margin, in the case of
commodities futures contracts, is primarily funded in the form of cash or United
States Treasury securities. Commodities transactions involve substantial risk,
principally because of low margin requirements permitted by the exchanges.
Income earned on financing customers' securities transactions
provides Smith Barney with an additional source of income. Credit losses may
arise as a result of this financing activity; however, to date, such losses have
not been material.
4
<PAGE> 7
Asset Management
Smith Barney provides discretionary and non-discretionary asset
management and consulting services to a wide array of mutual funds and
institutional and individual investors, with respect to domestic and foreign
equity and debt securities, municipal bonds, money market instruments, and
related options and futures contracts. Smith Barney typically receives ongoing
fees from its asset management and consulting clients, generally stated as a
percentage of the client's assets with respect to which Smith Barney's services
are rendered. At December 31, 1996, such client assets in the aggregate exceeded
$111.8 billion, as compared to approximately $96.2 billion at December 31, 1995
and approximately $78.0 billion at December 31, 1994.
At December 31, 1996, Smith Barney sponsored 59 mutual funds
(open-end investment companies) with aggregate assets of approximately $69.7
billion distributed through its sales force of Financial Consultants. Of these,
ten are taxable and tax-exempt money market funds, with assets of approximately
$41.2 billion. At December 31, 1995, aggregate assets in Company-sponsored
mutual funds were approximately $61.6 billion, of which approximately $35.6
billion related to money market funds, compared to aggregate assets in such
funds at December 31, 1994 of approximately $50.6 billion, $28.6 billion of
which related to money market funds. A wholly owned subsidiary of SB Holdings
serves as investment manager to these mutual funds, as well as to twelve
closed-end investment companies, the shares of which are listed for trading on
one or more securities exchanges. At December 31, 1996 and December 31, 1995,
assets of these closed-end funds aggregated approximately $2.8 billion, as
compared to approximately $2.5 billion at December 31, 1994. The open-end and
closed-end funds sponsored and managed by Smith Barney have various investment
objectives, including growth, growth and income, taxable income and tax-exempt
income. In addition, at December 31, 1996, Smith Barney managed 25 mutual fund
portfolios serving as funding vehicles for variable annuity contracts, with
aggregate assets of approximately $2.3 billion. At December 31, 1995 and
December 31, 1994, aggregate assets in the mutual fund portfolios managed by the
Company were approximately $1.8 billion and $1.4 billion, respectively. This
includes six mutual fund portfolios that are investment options for the
Travelers Universal variable annuity contracts. Smith Barney also sponsors and
manages nine mutual funds domiciled outside the U.S. which are offered to Smith
Barney's non-resident alien client base. At December 31, 1996, these off-shore
funds had aggregate assets of approximately $1.2 billion, as compared to
approximately $980 million at December 31, 1995 and approximately $780 million
at December 31, 1994.
In 1996, Smith Barney launched The Concert Series-SM-, a group of
mutual funds that invests in various Smith Barney mutual funds instead of
directly in stocks, bonds or other securities. The Concert Series-SM- simplifies
the process of investing and enables investors to achieve a broad
diversification of their investments. The Concert Series-SM- is sold through
Smith Barney Financial Consultants and the PFS sales force.
5
<PAGE> 8
In addition to these proprietary funds, Smith Barney also sells
through its Financial Consultants a large number of mutual funds sponsored and
managed by unaffiliated entities. Smith Barney receives commissions and other
sales and service revenues from this activity.
Smith Barney also sponsors and oversees the portfolios of a large
number of unit investment trusts, which are unmanaged investment companies, the
portfolios of which are generally static. Such unit investment trusts may hold
domestic and foreign equity and debt securities, including municipal bonds.
Certain trusts are sponsored and overseen solely by Smith Barney; other trusts
are jointly sponsored through a syndicate of major broker-dealers of which Smith
Barney is a member. At December 31, 1996, outstanding unit trust assets held by
Smith Barney clients exceeded $8.6 billion, as compared to approximately $7.2
billion at December 31, 1995 and approximately $6.4 billion at December 31,
1994.
Smith Barney's asset management units provide separate account
discretionary investment management services to a wide variety of individual and
institutional clients, including private and public retirement plans,
endowments, municipalities and other institutions. Client relationships may be
introduced through Smith Barney's network of Financial Consultants or
independent from such network (e.g., through traditional pension plan
consultants unaffiliated with the Company). Assets under Smith Barney's
management exceeded $24.0 billion at December 31, 1996, as compared to
approximately $20.4 billion at December 31, 1995 and approximately $15.7 billion
at December 31, 1994.
Smith Barney's Consulting Group ("CG") provides a variety of
investment management and consulting services to institutional and individual
clients. CG sponsors a number of different "wrap fee" programs, in which CG and
Smith Barney typically provide: an analysis of the client's financial situation,
investment needs and risk tolerance; a recommendation that the client retain one
or more investment management firms (which may be affiliated or unaffiliated
with Smith Barney); ongoing monitoring of the performance and suitability of the
investment manager(s) retained; securities execution and custody; and client
reporting and recordkeeping. In such programs, the client generally pays a
single bundled fee for the services provided. CG also provides traditional
investment management consulting services to institutions, including assisting
clients in formulating investment objectives and policies and in selecting
investment management firms for the day-to-day management of client portfolios.
CG's programs and services generally are delivered through Smith Barney
Financial Consultants, many of whom specialize in such programs and services. As
of December 31, 1996, Smith Barney provided consulting services with respect to
client assets aggregating approximately $49.1 billion, excluding the
TRAK-R-program described below, as compared to approximately $39.1 billion at
December 31, 1995 and approximately $29.7 billion at December 31, 1994.
Smith Barney's TRAK-R- program provides clients with
non-discretionary asset allocation advice based on the client's identification
of investment objectives and risk tolerances. TRAK-R- clients include both
individuals and institutions, including participant-
6
<PAGE> 9
directed 401(k) plans. Clients can choose to allocate assets among the CG
Capital Markets funds, a series of 13 mutual funds each corresponding to a
particular asset class and investment style, or from among the selected fund
offerings of 28 no-load or load-waived mutual fund families (including Smith
Barney's family of funds) corresponding to the same asset class and investment
style criteria. At December 31, 1996, TRAK-R- assets exceeded $6.6 billion, as
compared to approximately $4.8 billion at December 31, 1995 and approximately
$3.3 billion at December 31, 1994. Smith Barney also offers a separate offshore
TRAK-R- program to non-resident alien clients, which includes client investment
in a series of asset class/investment style funds domiciled outside the United
States.
Miscellaneous Activities
Certain of the Company's subsidiaries are chartered as trust
companies and provide a full range of fiduciary services with a particular
emphasis on personal trust services. Another subsidiary offers a broad range of
trustee services for qualified retirement plans, with particular emphasis on the
401(k) plan market. Each of these trust companies is subject to the supervision
of the state banking authority where it was chartered and uses the distribution
network of SBI to market its services. Although these trust companies are
subsidiaries of the Company and not of SB Holdings, their results are included
with Smith Barney for segment reporting purposes. Smith Barney provides certain
advisory and support services to the trust companies and receives fees for such
services.
In 1996, Smith Barney formed a joint venture with the Korea Exchange
Bank. The venture, a brokerage and underwriting company based in Seoul, South
Korea, that is owned 49% by Smith Barney, is engaged in the securities brokerage
and underwriting business in the Korean markets. The venture is licensed with
the Korea Ministry of Finance and Economy to conduct securities activities in
Korea.
General
Competition
The businesses in which Smith Barney is engaged are highly
competitive. The principal factors affecting competition in the investment
banking and securities brokerage industry are the quality and ability of
professional personnel and the relative prices of services and products offered.
In addition to competition from other investment banking firms, both domestic
and international, and securities brokerage companies and discount securities
brokerage operations, including regional firms in the United States, there has
been increasing competition from other sources, such as commercial banks,
insurance companies and other major companies that have entered the investment
banking and securities brokerage industry, in many cases through acquisitions.
Certain of those competitors may have greater capital and other resources than
Smith Barney. The Federal Reserve Board has substantially removed the barrier
originally erected by the Glass-Steagall Act restricting investment banking
activities of
7
<PAGE> 10
commercial banks and their affiliates, by permitting certain commercial banks to
engage, through affiliates, in the underwriting of and dealing in certain types
of securities, subject to certain limitations. Proposed legislation has been
introduced in Congress from time to time that would modify certain other
provisions of the Glass-Steagall Act and other laws and regulations affecting
the financial services industry. The potential impact of such legislation on the
Company's businesses cannot be predicted at this time.
Competitors of Smith Barney's mutual funds and asset management
operations include a large number of mutual fund management and sales companies
and asset management firms. Competition in mutual fund sales and investment
management is based on investment performance, service to clients and product
design.
Regulation
Certain of the Company's subsidiaries are registered as
broker-dealers and as investment advisers with the Securities and Exchange
Commission (the "Commission") and as futures commission merchants and as
commodity pool operators with the Commodity Futures Trading Commission ("CFTC").
SBI and The Robinson-Humphrey Company, Inc., an investment banking and financial
services subsidiary of SBI ("R-H"), are members of the New York Stock Exchange,
Inc. (the "NYSE") and other principal United States securities exchanges, as
well as the National Association of Securities Dealers, Inc. ("NASD") and the
National Futures Association ("NFA"), a not-for-profit membership corporation
which has been designated as a registered futures association by the CFTC. SBI
and R-H are registered as broker-dealers in all 50 states, the District of
Columbia and Puerto Rico, and in addition are registered as investment advisers
in certain states that require such registration. SBI is also a reporting dealer
to the Federal Reserve Bank of New York, a member of the principal United States
futures exchanges and a registered broker-dealer in Guam. Both SBI and R-H are
subject to extensive regulation, primarily for the benefit of their customers,
including minimum capital requirements, which are promulgated and enforced by,
among others, the Commission, the CFTC, the NFA, the NYSE, various
self-regulatory organizations of which SBI and R-H are members and the
securities administrators of the 50 states, the District of Columbia and Puerto
Rico and, in SBI's case, Guam. The Commission and the CFTC also require certain
registered broker-dealers (including SBI) to maintain records concerning certain
financial and securities activities of affiliated companies that may be material
to the broker-dealer, and to file certain financial and other information
regarding such affiliated companies.
Smith Barney's operations abroad, described in this paragraph, are
conducted through various subsidiaries. Its activities in the United Kingdom,
which include investment banking, trading, brokerage and asset management
services, are subject to the Financial Services Act 1986, which regulates
organizations that conduct investment businesses in the United Kingdom
(including imposing capital and liquidity requirements), and to the rules of the
Securities and Futures Authority and the Investment Management Regulatory
Organization. Smith Barney is a member of the International Petroleum Exchange,
the London Metals
8
<PAGE> 11
Exchange and the London International Financial Futures and Options Exchange
and, as such, is subject to the rules and regulations of those Exchanges. In
Ireland, a Smith Barney subsidiary that sponsors commodities-related pooled
investment funds is subject to the supervision of the Central Bank of Ireland.
In France, Smith Barney operates as a regulated securities house and an
authorized mutual fund manager. Smith Barney is a licensed securities company in
Japan and, as such, its activities in Japan are subject to Japanese law
applicable to securities firms. Smith Barney is also a member of the Tokyo Stock
Exchange and the Osaka Stock Exchange, and its activities in Japan are therefore
subject to the rules and regulations of those Exchanges. Smith Barney conducts
securities and commodities businesses in Singapore and Hong Kong that are
regulated by the Monetary Authority of Singapore and the Hong Kong Securities
and Futures Commission, respectively. Smith Barney also is a member of the
Singapore International Monetary Exchange and is a "B license holder" with the
Zurich Stock Exchange. Additionally, certain subsidiaries of SB Holdings are
licensed as an "international dealer," an "international adviser" and an
"investment dealer" with the Ontario Securities Commission, and as
broker-dealers with the Securities Board of The Netherlands. Smith Barney's
representative offices in Mexico City, Mexico, Paris, France, Beijing, People's
Republic of China, Manama, Bahrain and Taipei, Taiwan are also subject to the
jurisdiction of local financial services regulatory authorities. Smith Barney
also operates a private trust services business that is licensed as a bank and
trust company in the Cayman Islands, and is subject to the regulation of the
Director of Financial Services, Banks & Trust Companies Supervision Department
of the Cayman Islands.
In connection with the mutual funds business, Smith Barney must
comply with regulations of a number of regulatory agencies and organizations,
including the Commission and the NASD. The Company, through Smith Barney, is the
indirect parent of investment advisers registered and regulated under the
Investment Advisers Act of 1940, and of companies that distribute shares of
mutual funds pursuant to distribution agreements subject to regulation under the
Investment Company Act of 1940. Under those Acts, the advisory contracts between
the Company's investment adviser subsidiaries and the mutual funds they serve
("Affiliated Funds"), as well as the mutual fund distribution agreements, would
automatically terminate upon an assignment of such contracts by the investment
adviser or the fund distribution company, as the case may be. Such an assignment
would be presumed to have occurred if any party were to acquire more than 25% of
the Company's voting securities. Continuation of advisory and distribution
relationships under these circumstances could be achieved only by obtaining
consent to the assignment from the shareholders of the Affiliated Funds
involved. In addition, SBI and the Affiliated Funds are subject to certain
restrictions in their dealings with each other. For example, SBI may act as
broker to an Affiliated Fund in a transaction involving an exchange-traded
security only when that fund maintains procedures that govern, among other
things, the execution price of the transaction and the commissions paid; SBI may
not, however, conduct principal transactions with an Affiliated Fund. Further,
an Affiliated Fund may acquire securities during the existence of an
underwriting where SBI is a principal underwriter only in certain limited
situations.
9
<PAGE> 12
SBI and R-H are members of the Securities Investor Protection
Corporation ("SIPC"), which, in the event of liquidation of a broker-dealer,
provides protection for customers' securities accounts held by the firm of up to
$500,000 for each eligible customer, subject to a limitation of $100,000 for
claims for cash balances. In addition, Smith Barney has purchased additional
coverage of up to $150 million for eligible customers, approximately $50 million
of which is from a subsidiary of the Company.
As registered broker-dealers, SBI and R-H are subject to the
Commission's net capital rule, Rule 15c3-1 (the "Net Capital Rule"), promulgated
under the Exchange Act. SBI and R-H compute net capital under the alternative
method of the Net Capital Rule which requires the maintenance of minimum net
capital, as defined. A member of the NYSE may be required to reduce its business
if its net capital is less than 4% of aggregate debit balances (as defined) and
may also be prohibited from expanding its business or paying cash dividends if
resulting net capital would be less than 5% of aggregate debit balances.
Furthermore, the Net Capital Rule does not permit withdrawal of equity or
subordinated capital if the resulting net capital would be less than 5% of such
debit balances.
The Net Capital Rule also limits the ability of broker-dealers to
transfer large amounts of capital to parent companies and other affiliates.
Under the Net Capital Rule, equity capital cannot be withdrawn from a
broker-dealer without the prior approval of the Commission in certain
circumstances, including when net capital after the withdrawal would be less
than (i) 120% of the minimum net capital required by the Net Capital Rule, or
(ii) 25% of the broker-dealer's securities position "haircuts," i.e., deductions
from capital of certain specified percentages of the market value of securities
to reflect the possibility of a market decline prior to disposition. In
addition, the Net Capital Rule requires broker-dealers to notify the Commission
and the appropriate self-regulatory organization two business days before a
withdrawal of excess net capital if the withdrawal would exceed the greater of
$500,000 or 30% of the broker-dealer's excess net capital, and two business days
after a withdrawal that exceeds the greater of $500,000 or 20% of excess net
capital. Finally, the Net Capital Rule authorizes the Commission to order a
freeze on the transfer of capital if a broker-dealer plans a withdrawal of more
than 30% of its excess net capital and the Commission believes that such a
withdrawal would be detrimental to the financial integrity of the firm or would
jeopardize the broker-dealer's ability to pay its customers. For additional
information on the Net Capital Rule, see Note 14 of Notes to Consolidated
Financial Statements.
10
<PAGE> 13
CONSUMER FINANCE SERVICES
The Company's Consumer Finance Services segment includes consumer
lending services conducted primarily under the name "Commercial Credit," as well
as credit-related insurance and credit card services. CCC's predecessor was
founded in 1912.
Consumer Finance
As of December 31, 1996, Consumer Finance Services maintained 859
loan offices in 44 states, including servicing centers for loans sold through
the PFS sales force. The Company owns two state-chartered banks headquartered in
Newark, Delaware, which generally limit their activities to offering credit card
services nationwide.
Loans to consumers by the Consumer Finance Services unit include
real estate-secured loans, both fixed and variable rate secured and unsecured
personal loans and fixed rate loans to finance consumer goods purchases. Credit
card loans are discussed below. CCC's loan offices are generally located in
small to medium-sized communities in suburban or rural areas, and are managed by
individuals who generally have considerable consumer lending experience. The
primary market for CCC's consumer loans consists of households with an annual
income of $20,000 to $50,000. The number of active loan customers (excluding
credit card customers) was approximately 1,333,000 at December 31, 1996, as
compared to approximately 1,275,000 at December 31, 1995 and approximately
1,177,000 at December 31, 1994. In 1996, CCC created an agency that performs
appraisals, sells title insurance and provides other closing-related services
for CCC's real-estate loans.
Two CCC loan programs solicit applications for loans exclusively
through the PFS sales force. During 1996, CCC converted 27 of its loan offices
to servicing centers for the loan products sold through the PFS sales force. At
December 31, 1996, the total loans outstanding generated from this program were
$1.524 billion, or approximately 19% of CCC's total loans outstanding, as
compared to $1.258 billion, or approximately 17%, at December 31, 1995 and
$1.107 billion, or approximately 16%, at December 31, 1994. See "Life Insurance
Services -- Primerica Financial Services."
The average amount of cash advanced per real estate-secured loan
made was approximately $35,800 in 1996, $26,300 in 1995 and $28,400 in 1994. The
average amount of cash advanced per personal loan made was approximately $4,250
in 1996 and $4,200 in each of 1995 and 1994. The average real estate-secured
loan size increased in 1996 due to marketing initiatives that attracted
customers for higher balance loans, particularly in first mortgage programs. The
average annual yield for loans in 1996 was 15.24%, as compared to 15.64% in 1995
and 15.41% in 1994. The average annual yield for real estate-secured loans in
1996 was 12.13%, as compared to 12.33% in 1995 and 12.20% in 1994, and for
personal loans it was 19.95% in 1996, as compared to 20.23% in 1995 and 20.20%
in 1994. The average yield for real estate-secured loans has been affected by
the normal run-off of older, higher
11
<PAGE> 14
yielding loans and growth in lower yielding, higher quality loans, while the
average yield for personal loans has been affected by the industry trends
associated with rising personal bankruptcies. Consumer Finance Services' average
net interest margin for loans was 8.64% in 1996, 8.79% in 1995 and 8.76% in
1994.
CCC's delinquency and charge-off rates reached historically low
levels in 1994 and rose in 1995 and 1996, consistent with recent industry
trends. This increase in delinquencies and charge-offs reflects a continued high
level of personal bankruptcies, a national trend that shows no indication of
reversing itself. See "-- Delinquent Receivables and Loss Experience."
Analysis of Consumer Finance Receivables
For an analysis of consumer finance receivables, net of unearned
finance charges ("Consumer Finance Receivables"), see Note 9 of Notes to
Consolidated Financial Statements.
Delinquent Receivables and Loss Experience
Due to the nature of the finance business, some customer delinquency
and loss is unavoidable. The management of the consumer finance business
attempts to control customer delinquencies through careful evaluation of each
borrower's application and credit history at the time the loan is made or
acquired, and appropriate collection activity. An account is considered
delinquent for financial reporting purposes when a payment is more than 60 days
past due, based on the original or extended terms of the contract. The
delinquency and loss experience on real estate-secured loans is generally more
favorable than on personal loans.
The following table sets forth the ratio of receivables delinquent
for 60 days or more on a contractual basis (i.e., more than 60 days past due) to
gross receivables outstanding:
Ratio of Receivables Delinquent 60 Days or More
to Gross Receivables Outstanding (1)
Real
Estate-
Personal Secured Credit Sales Total
As of December 31, Loans Loans Cards Finance Consumer
- ------------------ ----- ----- ----- ------- --------
1996 3.42% 1.50% 1.44% 2.27% 2.38%
1995 2.89% 1.42% 1.40% 2.17% 2.14%
1994 2.40% 1.48% 1.05% 1.79% 1.88%
- ----------
(1) The receivable balance used for these ratios is before the deduction of
unearned finance charges and excludes accrued interest receivable.
Receivables delinquent 60 days or more include, for all periods presented,
accounts in the process of foreclosure.
12
<PAGE> 15
The following table sets forth the ratio of net charge-offs to
average Consumer Finance Receivables. For all periods presented, the ratios
shown give effect to all deferred origination costs.
Ratio of Net Charge-Offs to Average Consumer Finance Receivables
Real
Estate-
Year Ended Personal Secured Credit Sales Total
December 31, Loans Loans Cards Finance Consumer
- ------------------ ----- ----- ----- ------- --------
1996 5.46% 0.50% 2.75% 3.34% 2.91%
1995 4.01% 0.64% 2.04% 2.46% 2.28%
1994 3.50% 0.82% 1.83% 2.03% 2.08%
The following table sets forth information regarding the ratio of
allowance for losses to Consumer Finance Receivables:
Ratio of Allowance For Losses to Consumer Finance Receivables
As of December 31,
------------------
1996 2.97%
1995 2.66%
1994 2.64%
Credit-Related Insurance
American Health and Life Insurance Company ("AHL"), a subsidiary of
CCC, underwrites or arranges for credit-related insurance, which is offered to
customers of the consumer finance business. AHL has an A+ (superior) rating from
A.M. Best Company ("A.M. Best"), whose ratings may be revised or withdrawn at
any time. At a minimum, credit life insurance covers the declining balance of
unpaid indebtedness. Credit disability insurance provides monthly benefits
during periods of covered disability. Credit property insurance covers the loss
of property given as security for loans. Other insurance products offered or
arranged for by AHL primarily include auto single interest and involuntary
unemployment insurance. Most of AHL's products are single premium, which
premiums are earned over the related contract period. See "Life Insurance
Services" for information concerning life insurance other than credit-related
insurance.
13
<PAGE> 16
The following table sets forth gross written insurance premiums, net
of refunds, for consumer finance customers:
Consumer Finance Insurance Premiums Written
(in millions)
Year Ended December 31,
--------------------------
1996 1995 1994
---- ---- ----
Premiums written by AHL and its affiliates
Writings for consumer finance:
Credit life $ 42.7 $ 41.8 $ 43.3
Credit disability and other 63.1 61.4 66.7
Credit property and other 18.0 4.1 3.0
------ ------ ------
Total $123.8 $107.3 $113.0
====== ====== ======
Premiums written by other insurance companies
Credit property and other $ 42.9 $ 51.6 $ 52.8
====== ====== ======
Net premiums written began to increase in late 1996 compared to 1995
primarily due to growth in loan receivables. Net premiums written were
relatively flat in early 1996 and 1995 compared to 1994 primarily due to slower
growth in loan receivables.
Credit Card Services
The Travelers Bank, a subsidiary of CCC, is a state-chartered bank
located in Newark, Delaware, which provides credit card services, including
upper market gold credit card services, to individuals and to affinity groups
(such as nationwide professional associations and fraternal organizations). The
Travelers Bank USA, another state-chartered bank subsidiary of CCC, is not
subject to certain regulatory restrictions relating to cross-marketing
activities to which The Travelers Bank is subject. See "-- Regulation." These
banks generally limit their activities to credit card operations.
The following table sets forth aggregate information regarding
credit cards issued by The Travelers Bank and The Travelers Bank USA.
Credit Cardholders and Total Outstandings
(outstandings in millions)
As of, or for the year ended, December 31,
------------------------------------------
1996 1995 1994
---- ---- ----
Approximate total credit cardholders 791,000 753,000 621,000
Approximate gold credit cardholders 642,000 615,000 519,000
Total outstandings $907.1 $761.8 $712.5
Average annual yield 11.82% 12.51% 11.88%
14
<PAGE> 17
The primary market for the banks' credit cards consists of
households with annual incomes of $40,000 and above.
The banks offer deposit-taking services (which as to The Travelers
Bank USA are limited to deposits of at least $100,000 per account). At December
31, 1996, deposits of unaffiliated entities were $81.9 million, as compared to
$97.9 million at December 31, 1995 and $73.3 million at December 31, 1994. The
decrease in the average annual yield in 1996 primarily resulted from the
offering of promotional rates in 1996 to encourage the transfer of credit card
balances to the Company's banks.
Competition
The consumer finance business competes with banks, savings and loan
associations, credit unions, credit card issuers and other consumer finance
companies. Additionally, substantial national financial services networks have
been formed by major brokerage firms, insurance companies, retailers and bank
holding companies. Some competitors have substantial local market positions;
others are part of large, diversified organizations. Deregulation of banking
institutions has greatly expanded the consumer lending products permitted to be
offered by these institutions, and because of their long-standing insured
deposit base, many of them are able to offer financial services on very
competitive terms. The Company believes that it is able to compete effectively
with such institutions. In particular, the Company believes that the diversity
and features of the products it offers, personal service, and cultivation of
repeat and referral business support and strengthen its competitive position in
its Consumer Finance Services businesses.
Regulation
Most consumer finance activities are subject to extensive federal
and state regulation, including examination and review by state authorities of
consumer finance offices. Personal loan, real estate-secured loan and sales
finance laws generally require licensing of the lender, limitations on the
amount, duration and charges for various categories of loans, adequate
disclosure of certain contract terms and limitations on certain collection
practices and creditor remedies. Federal consumer credit statutes primarily
require disclosure of credit terms in consumer finance transactions. CCC's
banks, which must undergo periodic examination, are subject to additional
regulations relating to capitalization, leverage, reporting, dividends and
permitted asset and liability products. These banks are also covered by the
Competitive Equality Banking Act of 1987 (the "Banking Act"), which, with
respect to The Travelers Bank, restricts cross-marketing of products by or of
certain affiliates. CCC's banks are also subject to the Community Reinvestment
Act, which assesses the bank's record in helping to meet the credit needs of low
and moderate income persons in such bank's delineated community, and the Fair
Credit Reporting Act, which is aimed at ensuring the accuracy and
15
<PAGE> 18
fairness of the mechanism by which consumer credit and other information on
consumers is assembled and evaluated. The Company believes that it complies in
all material respects with applicable regulations. See "Insurance Services
General -- Regulation" at the end of the description of the Life Insurance
Services segment for a discussion of the regulatory factors governing the
insurance businesses of CCC.
The Real Estate Settlement Procedures Act of 1974 ("RESPA") covers
real estate loans secured by residential real estate. Generally, RESPA requires
disclosure of certain information to customers and regulates the receipt or
payment of fees or charges for services performed.
Proposed legislation has been introduced in Congress that would
modify certain laws and regulations affecting the financial services industry.
The potential impact of such legislation on the Company's businesses cannot be
predicted at this time.
PROPERTY & CASUALTY INSURANCE SERVICES
This segment includes the operations of TAP and its subsidiary and
affiliated property-casualty insurance companies, all of which are collectively
referred to herein as "TAP." TAP provides a wide range of commercial and
personal property and casualty insurance products and services to businesses,
government units, associations and individuals. As described above, on April 2,
1996, TAP acquired Aetna P&C. The Company's results of operations for periods
prior to April 2, 1996 do not include the results of Aetna P&C. See Notes 2 and
4 of Notes to Consolidated Financial Statements. For informational purposes, the
premium and certain other operational information provided below includes Aetna
P&C's businesses prior to the Acquisition.
Commercial Lines
TAP is the third largest writer of commercial lines insurance in the
United States based on 1995 direct written premiums published by A.M. Best,
after giving effect to the Acquisition and recent industry consolidation. TAP's
Commercial Lines offers a broad array of property and casualty insurance and
insurance-related services. Commercial Lines is organized into four marketing
and underwriting groups that are designed to focus on a particular client base
or industry segment to provide products and services that specifically address
customers' needs: National Accounts, primarily serving large national
corporations; Commercial Accounts, serving mid-size businesses; Select Accounts,
serving small businesses and individuals with commercial exposures; and
Specialty Accounts, providing a variety of specialty coverages. TAP also has a
dedicated group within Commercial Lines that serves the construction industry.
TAP distributes its commercial products through approximately 4,600 brokers and
independent agencies located throughout the United States.
The commercial coverages marketed by TAP include workers'
compensation, general liability (including product liability), commercial
multi-peril, commercial automobile, property
16
<PAGE> 19
(including fire and allied lines) and several other miscellaneous coverages. TAP
also underwrites specialty coverages through three separate units, Travelers
Specialty, Gulf Specialty and Bond Specialty, which have historically focused on
unique risks that typically require specialized underwriting. Coverages offered
by Travelers Specialty include general liability for selected product liability
risks, medical malpractice and umbrella and excess liability. Coverages offered
by Gulf Specialty include directors' and officers' liability and errors and
omissions insurance for various professions, umbrella insurance, insurance for
municipalities, hard to place coverages sold on an excess and surplus lines
basis and fidelity and surety coverage. Coverages offered by Bond Specialty
include fidelity and surety, fiduciary liability insurance, directors' and
officers' and other professional liability insurance and other related coverages
such as kidnap and ransom and mail insurance. In addition, TAP offers various
risk management services, generally including claims settlement, loss control
and engineering services, to businesses that choose to self-insure certain
exposures, to state funds and insurance carriers that participate in state
involuntary workers' compensation pools and to employers seeking to manage
workers' compensation medical and disability costs. In 1996, Commercial Lines
generated combined net written premiums of $4.7 billion and combined premium
equivalents of $2.7 billion. As used herein, unless the context otherwise
requires, "combined" refers to the operations of both Travelers P&C and Aetna
P&C, without regard to the date of the Acquisition.
Selected Product and Market Information
The following table sets forth by product line and market net
written premiums and premium equivalents for Commercial Lines for the periods
indicated. For a description of the product lines and markets referred to in the
table below, see "-- Product Lines" and "-- Principal Markets and Methods of
Distribution," respectively.
Over the past several years, National Accounts customers have moved
increasingly from traditional insurance coverages to service-type products,
primarily for workers' compensation coverage and to a lesser extent in general
liability and commercial automobile coverages. These types of products include
risk management services such as claims settlement, loss control and
engineering. The volume of business handled by TAP in servicing relationships is
measured by "premium equivalents." Premium equivalents do not represent actual
premium revenues. Premium equivalents are determined in the pricing process and
represent TAP's estimates of premiums that its customers would have been charged
under a fully insured arrangement, based on expected losses associated with
non-risk-bearing components of each account.
Because the Acquisition occurred on April 2, 1996, the Company's
results of operations for periods prior to April 2, 1996 do not include the
results of Aetna P&C. Accordingly, premium and other operational information
provided for TAP's combined businesses prior to such time is for informational
purposes only.
17
<PAGE> 20
<TABLE>
<CAPTION>
Combined Net Written Premiums and Premium Equivalents
Percentage of Total Net
Written Premiums and
Year Ended December 31, Premium Equivalents
-------------------------------- Year Ended December 31,
1996 1995 1994 1996
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Net written premiums by
product line:
Workers' compensation $1,223 $1,312 $1,675 16.5%
General liability 836 815 941 11.3
Commercial multi-peril 1,223 1,188 1,119 16.5
Commercial automobile 806 888 932 10.9
Property 342 457 441 4.6
Fidelity and surety 215 233 209 2.9
Other 45 251 164 0.7
------ ------ ------ ----
Net written premiums (1) $4,690 $5,144 $5,481 63.4%
Premiums equivalents (2) 2,712 3,458 2,990 36.6
------ ------ ------ ----
Total Commercial Lines $7,402 $8,602 $8,471 100.0%
====== ====== ====== =====
<CAPTION>
Percentage of Total Net
Written Premiums and
Year Ended December 31, Premium Equivalents
-------------------------------- Year Ended December 31,
1996 1995 1994 1996
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Net written premiums and premium
equivalents by market:
National Accounts $3,499 $4,550 $4,463 47.3%
Commercial Accounts 1,812 1,962 2,159 24.5
Select Accounts 1,412 1,466 1,293 19.1
Specialty Accounts 679 624 556 9.1
------ ------ ------ -----
Total Commercial Lines (2) $7,402 $8,602 $8,471 100.0%
====== ====== ====== =====
</TABLE>
- ----------
(1) The decreases in net written premiums during the periods shown reflect the
highly competitive marketplace and TAP's selective underwriting practices.
(2) Premium equivalents for the year ended December 31, 1994 are provided for
Travelers P&C only. Historically, Aetna P&C did not track premium
equivalents and such amounts are not available for that period. The
decreases in premium equivalents during the periods shown reflect a
depopulation of involuntary pools as the loss experience of workers'
compensation improves and insureds move to voluntary markets, TAP's
selective renewal activity to address the competitive pricing environment
and its continued success in lowering workers' compensation losses of
customers.
18
<PAGE> 21
Product Lines
TAP writes a broad range of commercial property and casualty
insurance for risks of all sizes. The core products in TAP's Commercial Lines
are as follows:
Workers' Compensation provides coverage for employers' liability for
injuries to employees under common law as well as the obligation of an employer
under state or federal law to provide its employees with specified benefits for
work-related injuries, deaths and diseases, regardless of fault. In addition to
the liability exposure that may arise under common law, there are typically four
types of benefits payable under workers' compensation policies: medical
benefits, disability benefits, death benefits and vocational rehabilitation
benefits. Workers' compensation policies are often written in conjunction with
other commercial policies. TAP offers two types of workers' compensation
products: (i) insurance products, including guaranteed cost policies, in which
policy premiums charged are fixed and do not vary as a result of the insured's
loss experience, and loss sensitive plans, including retrospectively rated
policies, in which premiums are adjusted based on actual loss experience of the
insured during the policy period, and large deductible plans, in which the
customer bears the insurance risk up to its deductible amount, and (ii) service
programs, which are generally sold to TAP's larger National Accounts, where TAP
receives fees for providing loss prevention, risk management, claims
administration and benefit administration services to organizations pursuant to
service agreements. TAP also participates in state assigned risk pools servicing
workers' compensation policies as a servicing carrier and pool participant. TAP
emphasizes managed care cost containment strategies (which involve employers,
employees and care providers in a cooperative effort that focuses on the injured
employee's early return to work), cost-effective quality care, and customer
service in this market. Workers' compensation comprehensive claim and managed
care cost containment services are integrated through TAP's claims management
system to maximize cost savings on both service delivery and loss payout. For
the year ended December 31, 1996, TAP's workers' compensation line generated
$1.2 billion of combined net written premiums and $2.2 billion of combined
premium equivalents.
General Liability provides coverage for liability exposures
including bodily injury and property damage arising from products sold and
general business operations. General liability also includes coverage for
directors' and officers' liability arising in their official capacities,
fiduciary liability for trustees and sponsors of pension, health and welfare and
other employee benefit plans, errors and omissions insurance for employees,
agents, professionals and others arising from acts or failures to act under
specified circumstances, as well as medical malpractice, umbrella and excess
insurance. For the year ended December 31, 1996, TAP's general liability line
generated $836 million of combined net written premiums and $299 million of
combined premium equivalents.
Commercial Multi-Peril provides a combination of property and
liability coverage for businesses and business property for damages such as that
caused by fire, wind, hail, water, theft and vandalism, and protects businesses
from financial loss due to business interruption.
19
<PAGE> 22
It also insures businesses against third-party liability from accidents
occurring on their premises or arising out of their operations, such as injuries
sustained from products sold. For the year ended December 31, 1996, TAP's
commercial multi-peril line generated $1.2 billion of combined net written
premiums.
Commercial Automobile provides coverage for businesses against
losses incurred from personal bodily injury, bodily injury to third parties,
property damage to an insured's vehicle, and property damage to other vehicles
and other property resulting from the ownership, maintenance or use of
automobiles and trucks in a business. For the year ended December 31, 1996,
TAP's commercial automobile line generated $806 million of combined net written
premiums and $240 million of combined premium equivalents.
Property provides coverage for loss or damage to buildings,
inventory and equipment from natural disasters, including hurricanes,
windstorms, earthquakes, hail, explosions, severe winter weather and other
events such as theft and vandalism, fires and storms and financial loss due to
business interruption. Property also includes inland marine, which provides
coverage for goods in transit and unique, one-of-a-kind exposures. For the year
ended December 31, 1996, TAP's property line generated $342 million of combined
net written premiums.
Fidelity and Surety provides fidelity insurance coverage which
protects an insured for loss due to embezzlement or misappropriation of funds by
an employee. Surety is a three-party agreement whereby the insurer agrees to pay
a second party or make complete an obligation in response to the default, acts
or omissions of a third party. Surety is generally provided for construction
performance, legal matters such as appeals, trustees in bankruptcy and probate
and other performance bonds. For the year ended December 31, 1996, TAP's
fidelity and surety line generated $215 million of combined net written
premiums.
Other coverages include boiler and machinery insurance, which
provides coverage for loss or damage resulting from the malfunction of boilers
and machinery, as well as miscellaneous assumed reinsurance. For the year ended
December 31, 1996, these other coverages generated $45 million of combined net
written premiums.
Principal Markets and Methods of Distribution
Commercial Lines is organized into four marketing groups that are
designed to focus on a particular client base or industry segment to provide
products and services that specifically address customers' needs: National
Accounts, primarily serving large national corporations; Commercial Accounts,
serving mid-size businesses; Select Accounts, serving small businesses; and
Specialty Accounts, providing a variety of specialty coverages. TAP also has a
dedicated group within Commercial Lines that serves the construction industry.
TAP distributes its commercial products primarily through
approximately 4,600 brokers and independent agencies located throughout the
United States that are serviced by 99
20
<PAGE> 23
field offices. TAP seeks to establish relationships with well-established,
independent insurance agencies and brokers. In selecting new independent
agencies and brokers to distribute TAP's products, TAP considers each agency's
or broker's profitability, financial stability, staff experience and strategic
fit with TAP's operating and marketing plans. Once an agency or broker is
appointed, TAP carefully monitors its performance.
National Accounts
National Accounts serves large companies, as well as employee
groups, associations and franchises. National Accounts also includes TAP's
alternative market business (the "Alternative Market"), which primarily covers
workers' compensation products and services to voluntary and involuntary state
pools. National Accounts customers typically generate annual direct written
premiums and premium equivalents of over $1 million per account and generally
select products under retrospectively rated plans, large self-insured retentions
or some other loss-responsive arrangement. National Accounts programs involve
both traditional insurance (risk transfer) and risk service (claims settlement,
loss control and risk management). Customers are usually national in scope and
range in size from businesses with sales of approximately $10 million per year
to Fortune 2000 corporations. Products are marketed through national brokers and
regional agents with offices throughout the United States. Based on combined net
written premiums of $874 million and combined premium equivalents of $2.6
billion, National Accounts constituted approximately 47% of the Commercial Lines
business in 1996.
National Accounts customers often demand risk service programs where
the ultimate cost is based on their own loss experience. Programs offered by TAP
include claims settlement, loss control and risk management services and are
generally offered in connection with a retrospectively rated insurance policy, a
large deductible plan or a self-insured program. Workers' compensation accounted
for approximately 76% of the products sold in 1996 to National Accounts
customers, based on combined net written premiums and premium equivalents.
The Alternative Market business of National Accounts sells claims
and policy management services to workers' compensation and automobile assigned
risk plans, self-insurance pools throughout the United States and to niche
voluntary markets. Since 1993, most state assigned workers' compensation risk
plan contracts have been awarded through a formal state-by-state bid process.
Contracts, which are generally for three-year terms, are awarded by state
agencies based on quality of service and price. TAP has emerged as the largest
workers' compensation assigned risk plan servicing insurer in the industry with
approximately 28% share of the market in 1996. Assigned risk plan contracts
generated approximately $456 million in combined premium equivalents in 1996 for
TAP.
TAP also services self-insurance groups, sells excess workers'
compensation coverage to these groups and markets various workers' compensation
specialty programs. Self-insurance groups and these specialty programs generated
combined net written premiums
21
<PAGE> 24
and premium equivalents of $89 million in 1996. National Accounts also
participates in various involuntary assigned risk pools, which provide insurance
coverage to individuals or other entities that otherwise are unable to purchase
such coverage in the voluntary market. Participation in these pools in most
states is generally in proportion to voluntary writings of related lines of
business in that state.
Commercial Accounts
Commercial Accounts sells a broad range of property and casualty
insurance products through a large network of independent agents and brokers.
Commercial Accounts targets businesses with 75 to 1,000 employees that generate
between $50,000 and $1 million in annual direct written premiums and premium
equivalents. TAP offers a full line of products to its Commercial Accounts
customers, with an emphasis on guaranteed cost products. TAP also offers
retrospectively rated or large deductible programs to these customers. Based on
combined net written premiums of $1.7 billion and combined premium equivalents
of $87 million, Commercial Accounts constituted approximately 25% of the
Commercial Lines business in 1996.
Commercial Accounts targets certain industries in which TAP has
claims, engineering and underwriting expertise and to which TAP has established
dedicated operations. Industry segments include from the manufacturing sector:
advanced technology, metal products, mineral products, plastic and rubber
products manufacturing and wood products. Also targeted are colleges and
universities, transportation, retail, financial, property management and the
wholesale industry. TAP continues to develop new industry-targeted programs both
on a national and local level. Specific industry knowledge enables TAP to
select, as customers, better managed companies in an industry segment, to tailor
specialized coverages for those companies, and to link price to the individual
exposure and to control risk. Instead of relying on rating bureaus to establish
rates for products, TAP generally uses its proprietary data, which it has
compiled from many years of data generated by its extensive underwriting and
pricing experience. Accordingly, subject to applicable state insurance
regulations, prices are derived from those proprietary rates and numerous
variables that apply to specific risks. TAP believes that relying on extensive
proprietary data to assess individual risk characteristics, rather than relying
on data from industry rating bureaus, provides it with a competitive advantage
in pricing and underwriting commercial risks. TAP uses components of this
approach specifically in connection with loss control and claims management
processing. Through a network of field offices, TAP's marketing and underwriting
specialists, who have point of sale authority, work closely with local brokers
and agents to tailor insurance coverage to individual customer needs.
Construction. TAP has established dedicated operations that
exclusively target the construction industry, providing insurance and risk
management services for virtually all areas of construction, including general
contractors, heavy construction (including street and road) and special trade
contractors, except artisan or smaller trade contractors. TAP offers all product
lines to midsize and national customers in the construction market, including
both
22
<PAGE> 25
guaranteed cost and loss-responsive products, with general liability, workers'
compensation, commercial auto, commercial property and inland marine coverages.
The dedicated construction operations provide specialized service and
underwriting, with local market expertise and national capability, that enable
TAP to tailor specialized coverages, have competitive pricing and control risk.
This includes local underwriters who understand their state's laws and claim
climates, engineering and loss control specialists, professional claim
management and legal personnel with extensive construction experience.
Construction's products are distributed through independent agents and brokers
throughout the United States.
Select Accounts
Select Accounts serves individuals who have commercial exposures and
firms typically with one to 75 employees, typically generating up to $50,000 in
annual direct written premiums per account. Products offered to Select Accounts
are generally guaranteed cost policies, often a packaged product covering
property and liability exposures. Products are sold through independent agents,
who are often the same agents that sell TAP's Commercial Accounts and Personal
Lines products. Based on combined net written premiums of $1.4 billion, Select
Accounts constituted approximately 19% of the Commercial Lines business in 1996.
Personnel in TAP's field offices and other points of local service,
which are located throughout the United States, work closely with agents to
ensure a strong local presence in the marketplace. TAP utilizes a marketing and
underwriting approach based on agency automation and defined underwriting
criteria. Agency automation allows agents access to TAP's price quotation and
policy issuance systems and enables agents to provide faster and more
cost-effective service to customers with supervision and underwriting control.
Agents that do not utilize the automated quotation and policy issuance systems
work with TAP's sales and marketing representatives who have point of sale
authority. Agents serving Select Accounts are given greater control and
discretion over underwriting decisions, within predefined parameters, than
brokers selling to larger accounts. Because underwriting criteria and pricing
tend to be more standardized for smaller businesses, Select Accounts uses a
standard industry classification (S.I.C.) based process to allow agents and
field marketing representatives to make underwriting and pricing decisions
within predetermined classifications. Business in other classes is subject to
consultative review by in-house underwriters. TAP believes that its breadth of
products, highly qualified field staff and its technology offer distinct
competitive advantages.
Specialty Accounts
Specialty Accounts markets products to national, midsize and small
customers, as well as individuals, and distributes them through both wholesale
brokers and retail agents and brokers throughout the United States. TAP's fast
response time on underwriting decisions, industry expertise and quality service
are important to maintaining relationships with Specialty Accounts insureds and
producers. TAP believes that it has a competitive advantage with
23
<PAGE> 26
respect to many of these products based on its reputation for clear, timely
decision-making, underwriting and industry expertise and strong producer and
customer relationships as well as its ability to cross-sell with National
Accounts, Commercial Accounts and Select Accounts. Based on combined net written
premiums of $679 million, Specialty Accounts constituted approximately 9% of the
Commercial Lines business in 1996.
TAP has three separate marketing and underwriting groups within
Specialty Accounts:
Travelers Specialty provides a broad range of products targeting
risks that do not fall within the underwriting guidelines of the other
Commercial Lines segments and that require highly specialized underwriting. The
core products include general liability for select product liability risks,
umbrella and excess liability, medical malpractice, various types of
professional liability, errors and omissions liability, primary and excess
property, and various coverages that target the transportation industry.
Gulf Specialty focuses on many non-traditional lines of business
with a particular emphasis on the financial services market. Products include
directors' and officers' liability insurance, errors and omissions coverage for
bankers, investment counselors and mutual fund advisors, and fidelity and surety
coverage for related classes. In addition, Gulf Specialty offers errors and
omissions coverage for professionals and non-professionals such as lawyers,
architects and engineers, insurance agents, podiatrists and chiropractors. Gulf
Specialty also writes umbrella coverage for various industries, provides
insurance products to the entertainment industry and to municipalities and
provides insurance products for other industry specific programs. In addition,
Gulf Specialty has developed a book of excess and surplus lines business through
its non-admitted company.
Bond Specialty's range of products includes fidelity and surety
bonds, directors' and officers' and other professional liability insurance,
fiduciary liability insurance and other related coverages. The customer base
ranges from large financial services companies and commercial entities to small
businesses and individuals. Products and services are distributed primarily
through agents and brokers. Bond is organized around four broad customer
segments: Financial Services, Construction, National Risk (customers with more
than $500 million in revenues) and Commercial Risk (companies with less than
$500 million in revenues and individuals). Bond's agency agreement with
Executive Risk Management Associates ("ERMA"), a partnership owned by Executive
Risk, Inc., was restructured effective January 1, 1997. The restructured
agreement replaces the prior exclusive underwriter status of ERMA for directors'
and officers' liability insurance written by Aetna Casualty with a non-exclusive
agreement.
24
<PAGE> 27
Pricing and Underwriting
Pricing levels for property and casualty insurance products by
Commercial Lines are generally developed based upon the frequency and severity
of estimated losses, the expenses of producing business and administering
claims, and a reasonable allowance for profit. TAP's strategy emphasizes a
profit-oriented approach rather than a premium volume or market share-oriented
approach to underwriting. TAP's National Accounts business, which sells
primarily risk management services and loss sensitive products, continues to be
very competitive on price. Commercial Accounts and Select Accounts primarily
sell guaranteed cost products.
A significant portion of Commercial Lines business is written with
retrospectively rated insurance policies as well as large deductible policies in
which the ultimate cost of insurance for a given policy year is dependent on the
loss experience of the insured. Retrospectively rated policies are primarily
used in workers' compensation coverage. Although the payment terms and long-term
nature of the loss development reduces insurance risk, it introduces some
additional credit risk. Receivables from holders of retrospectively rated and
large deductible policies totaled approximately $755 million at December 31,
1996. Collateral, primarily letters of credit and, to a lesser extent, cash
collateral, is generally requested for contracts that provide for deferred
collection of ultimate premiums. The amount of collateral requested is
predicated upon the creditworthiness of the customer and the nature of the
insured risks. Commercial Lines continually monitors the credit exposure on
individual accounts and the adequacy of collateral.
Under certain workers' compensation insurance contracts with
deductible features, TAP is obligated to pay the claimant the full amount of the
claim. TAP is subsequently reimbursed by the contractholder for the deductible
amount, and is subject to credit risk until such reimbursement is made. At
December 31, 1996, contractholder receivables and payables were approximately
$1.8 billion.
TAP has developed an underwriting methodology that incorporates
underwriting, claims, engineering, actuarial and product development disciplines
for particular industries. This approach is designed to maintain high quality
underwriting and pricing discipline. This approach utilizes proprietary data
gathered and analyzed by TAP with respect to its Commercial Lines business over
many years. The underwriters and engineers use this information to assess and
evaluate risks prior to quotation. This information provides specialized
knowledge about industry segments and catastrophe management and helps analyze
risk based on account characteristics and pricing parameters designed to ensure
that TAP does not compromise its underwriting integrity. This process is linked
with strong underwriting interaction and review at TAP's and agents' locations.
TAP is also a member of and participates in the underwriting
operations of insurance and reinsurance pools and associations, several of which
make independent underwriting decisions on behalf of their members. These pools
insure specialized risks such as exposures related to the aviation and nuclear
power industries.
25
<PAGE> 28
TAP continually reviews its exposure to catastrophic losses and
attempts to mitigate such exposure. See "Insurance Services - General
- --Reinsurance." TAP uses sophisticated computer modeling techniques to assess
underwriting risks and renewal of business in catastrophe-prone areas.
Geographic Distribution
The following table shows the distribution of Commercial Lines'
direct written premiums for the states that accounted for the majority of
combined premium volume for the year ended December 31, 1996:
State % of Total
----- ----------
New York 13.5%
California 8.8
Texas 5.9
Massachusetts 5.9
Pennsylvania 4.5
Florida 4.5
New Jersey 4.1
Illinois 4.0
Connecticut 3.7
North Carolina 3.1
All Others (1) 42.0
------
Total 100.0%
======
- ----------
(1) No other single state accounted for 3.0% or more of the total combined
direct written premiums written in 1996 by TAP.
Personal Lines
TAP is the largest writer of personal lines insurance through
independent agents and the seventh largest writer of personal lines insurance
overall in the United States based on 1995 direct written premiums published by
A.M. Best, after giving effect to the Acquisition and recent industry
consolidation. In 1996, Personal Lines generated combined net written premiums
of approximately $2.7 billion. Personal Lines primarily offers personal
automobile and homeowners insurance.
Personal Lines distributes products primarily through approximately
5,000 independent agents located throughout the United States. TAP is also
pursuing a number of initiatives to broaden its distribution of Personal Lines
products, including targeted marketing to affinity groups, employee groups and
other sponsoring organizations and establishing co-
26
<PAGE> 29
marketing arrangements with other insurers. In 1994, TAP began a pilot program
to market personal automobile and homeowners insurance through the independent
agents of Primerica Financial Services ("PFS"), a unit of Travelers Group. The
product is sold under the name Secure-SM-, and the program has expanded to reach
37 states. Over 6,300 PFS agents were licensed to sell Secure-SM- products by
the end of 1996, and approximately 5,000 new automobile and homeowners policies
are now being sold through this program each month.
Selected Product Information
The following table sets forth by product line net written premiums
for Personal Lines for the periods indicated. For a description of the product
lines referred to in the table below, see "-- Product Lines."
Because the Acquisition occurred on April 2, 1996, the Company's
results of operations for periods prior to April 2, 1996 do not include the
results of Aetna P&C. Accordingly, premium and other operational information
provided for TAP's combined businesses prior to such time is for informational
purposes only.
<TABLE>
<CAPTION>
Combined Net Written Premiums
Percentage of Total
Net Written Premiums
Year Ended December 31, Year Ended
-------------------------------- December 31,
1996 1995 1994 1996
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Net written premiums by product line:
Personal automobile $1,851 $1,822 $1,969 69.2%
Homeowners and other 824 721 773 30.8
------ ------ ------ -----
Total Personal Lines $2,675 $2,543 $2,742 100.0%
====== ====== ====== =====
</TABLE>
Product Lines
TAP writes virtually all types of property and casualty insurance
covering personal risks. Personal Lines had approximately 4.2 million policies
in force at December 31, 1996. The primary coverages in Personal Lines are
personal automobile and homeowners insurance sold to individuals.
Personal Automobile provides coverage for liability to others for
both bodily injury and property damage and for physical damage to an insured's
own vehicle from collision and various other perils. In addition, many states
require policies to provide first-party personal injury protection, frequently
referred to as no-fault coverage. For the year ended December 31, 1996, TAP's
personal automobile policies generated $1.9 billion of combined net written
premiums.
27
<PAGE> 30
Homeowners and Other provides protection against losses to dwellings
and contents from a wide variety of perils, as well as coverage for liability
arising from ownership or occupancy. TAP writes homeowners insurance for
dwellings, condominiums, mobile homes and rental property contents. Other
products include coverage for boats, personal articles such as jewelry, and
umbrella liability protection. For the year ended December 31, 1996, TAP's
homeowners and other policies generated $824 million of combined net written
premiums.
Principal Markets and Methods of Distribution
Personal Lines products are distributed primarily through
approximately 5,000 independent agents located throughout the United States,
supported by a network of 23 field marketing offices and five customer service
centers. The principal markets for Personal Lines insurance are in states along
the East Coast, in the South, and in the Midwest. In the states of Florida, New
Jersey and Massachusetts, TAP operates stand-alone domestic companies to enhance
its competitive capability in these highly regulated markets. Separate business
units within Personal Lines market to affinity groups and through the sales
force of PFS.
Insurance companies generally market personal automobile and
homeowners insurance through one of two distribution systems: independent agents
or direct writing. The independent agents that distribute TAP's Personal Lines
products usually represent several unrelated property and casualty companies. In
contrast, direct writing companies operate either by mail or through exclusive
agents or sales representatives. Due in part to the expense advantage that
direct writers may have relative to companies using independent agents, the
direct writing companies have gradually expanded their market share in recent
years.
Personal Lines continues to focus on the independent agency
distribution system, recognizing the service and underwriting advantages the
agent can deliver. In addition to its agency distribution system, TAP is
pursuing a number of initiatives to broaden its distribution of Personal Lines
products, including targeted marketing to affinity groups, employee groups and
other sponsoring organizations and establishing co-marketing arrangements with
other insurers. In 1994, TAP began writing personal automobile and homeowners
insurance through the independent agents of PFS in order to broaden the
distribution of its Personal Lines products. This program is now available in 37
states.
In 1995, Aetna P&C entered into a marketing agreement with GEICO to
write the majority of GEICO's homeowners business, and to receive referrals from
GEICO for new homeowners business. This agreement added historically profitable
business and helped geographically diversify the homeowners line of business.
New business referrals began in July 1995 and, on January 1, 1996, Personal
Lines began writing renewal policies. This marketing agreement provides for
limits on Personal Lines' obligation to write new and renewal business in
certain catastrophe-prone areas.
TAP believes that its focus on service, including prompt and
efficient claims handling, a high level of automation and development of
long-term relationships with
28
<PAGE> 31
individual agents gives it a competitive advantage in the Personal Lines market.
In addition, TAP is leveraging its service, claims handling and automation
experience in the expansion of its distribution channels through its PFS and
affinity marketing initiatives.
Pricing and Underwriting
Pricing for personal automobile insurance is driven by changes in
the relative frequency of claims and by inflation in the cost of automobile
repairs, medical care and litigation of liability claims. As a result, the
profitability of the business is largely dependent on promptly identifying and
rectifying disparities between premium levels and expected claim costs, and
obtaining approval of the state regulatory authorities for indicated rate
increases. Premiums charged for physical damage coverage reflect insured car
values and, accordingly, premium levels are somewhat related to the volume of
new car sales.
Pricing in the homeowners business is also driven by changes in the
frequency of claims and by inflation in building supplies, labor costs and
household possessions. Most homeowners policies offer (but do not require)
automatic increases in coverage to reflect growth in replacement costs and
property values. In addition to the normal risks associated with any multiple
peril coverage, the profitability and pricing of homeowners insurance is
affected by the incidence of natural disasters, particularly hurricanes, winter
storms, earthquakes and tornadoes. The high level of catastrophe losses in
recent years has resulted in a reduced availability of homeowners insurance and
has led to higher prices for homeowners policies in some markets. In order to
reduce its exposure to catastrophe losses, TAP has limited the writing of new
homeowners business and selectively non-renewed existing homeowners business in
certain markets, tightened underwriting standards and implemented price
increases in certain hurricane-prone areas, subject to restrictions imposed by
insurance regulatory authorities. In California, TAP has introduced an
endorsement that reduces its exposure to catastrophic earthquake claims by
increasing the deductible and limiting other policy coverages in the event of an
earthquake loss. TAP uses computer modeling techniques to assess its level of
exposure to loss in catastrophe-prone areas. Changes to methods of marketing and
underwriting in coastal areas of Florida and New York and in California are
subject to state-imposed restrictions, the general effect of which is to make it
more difficult for an insurer to reduce exposures.
Insurers writing property-casualty policies are generally unable to
increase rates until some time after the costs associated with coverage have
increased, primarily as a result of state insurance rate regulation laws. The
pace at which an insurer can change rates in response to competition or to
increased costs depends, in part, on whether the applicable rate regulation law
requires prior approval of a rate increase or notification to the regulator
either before or after a rate increase is imposed. In states having prior
approval laws, a rate must be approved by the regulator before it may be used by
the insurer. In states having "file-and-use" laws, the insurer must file the
rate with the regulator, but does not need to wait for approval before using it.
A "use-and-file" law requires an insurer to file rates within a certain period
of time
29
<PAGE> 32
after the insurer begins using the new rate. Approximately one-half of the
states, including New York and Pennsylvania, require prior approval of rate
increases.
Underwriting of Personal Lines products is conducted primarily by
independent agents. Agents underwrite Personal Lines policies under strict
underwriting guidelines established and monitored by TAP. Each agent is assigned
to a specific employee of TAP or team of employees responsible for working with
the agent on business plan development, marketing, and overall growth and
profitability. TAP uses agency level management information to analyze and
understand results and to identify problems and opportunities.
Geographic Distribution
The following table shows the distribution of Personal Lines' direct
written premiums for the states that accounted for the majority of combined
premium volume for the year ended December 31, 1996:
State % of Total
----- ----------
New York 23.2%
Pennsylvania 9.0
New Jersey 8.6
Florida 8.5
Texas 8.3
Massachusetts 6.9
Connecticut 6.1
Virginia 3.8
All others (1) 25.6
------
Total 100.0%
======
- ----------
(1) No other single state accounted for 3.0% or more of the total combined
direct written premiums written in 1996 by TAP.
Claims Administration
TAP employs approximately 8,900 claims employees located throughout
the United States. These employees include telephone and road adjusters,
appraisers, litigation specialists, staff attorneys, regional and home office
management and support staff. TAP handles over 90% of its claims internally and
employs external adjusters primarily where geographic location makes it
impractical to use TAP's own adjusters. TAP has an investigative unit that
handles claims that TAP suspects may be fraudulent. TAP also employs a staff of
lawyers who are responsible for the management of TAP's claims litigation. TAP's
30
<PAGE> 33
claims handlers include professionals with the technical expertise necessary to
deal with more complex coverage, liability and damage issues.
In its handling of claims, TAP strives to balance customer
expectations of service with its business objectives of effectively managing
loss exposure and controlling claims expense. In an effort to resolve claims
efficiently, TAP matches claims settlement authority to the ability of its
claims personnel and matches its in-house expertise with the issues involved in
the claim. TAP's workers' compensation claim adjudication process is being
re-engineered to encompass a higher level of nursing/medical intervention, a
more effective use of preferred provider networks to better manage medical and
lost-time claims, and a renewed emphasis on prompt and thorough investigations.
TAP's new Personal Lines claims workstation implemented in 1995 and
workers' compensation claim workstation implemented in 1994 have improved the
speed and quality of both Personal Lines and Commercial Lines claims service,
and have helped loss payout performance. Use of technology such as VRUs (voice
response units) has lowered the cost of settling claims and shortened the time
to claim payment. The claim department also provides automated feedback from
claim handlers to underwriters to help with risk assessment and accurate pricing
information. Since the date of the Acquisition, significant progress has been
made in converting all of TAP's claims processing to this technology. In
Personal Lines, all new automobile and homeowners notices are now entered into
TAP's claims database through the new workstation which provides access to data
for both Aetna P&C and Travelers P&C sourced customers through one professional
claim workstation. In Commercial Lines workers' compensation, all first reports
of injury have been converted to the new telephone reporting system and a
conversion of all open claims to utilize the new workstation is under way.
The home office claims department periodically conducts internal
file reviews of claims offices to monitor adherence to claims policies and
procedures, the adequacy of case reserves, claims loss control, claims expense
control, productivity and service standards. Regional claims management
periodically audits sample files of claims representatives as part of their
supervisory process.
Environmental, asbestos and cumulative injury claims are segregated
from other claims and are handled separately by TAP's Special Liability Group, a
special unit staffed by dedicated legal, claim, finance and engineering
professionals. See "-- Environmental, Asbestos and Cumulative Injury Claims."
Reserves
Property and casualty claim reserves are established to account for
the estimated ultimate costs of claims and claim adjustment expenses for claims
that have been reported but not yet settled and claims that have been incurred
but not reported. TAP establishes reserves by line of business, coverage and
year.
31
<PAGE> 34
The process of estimating claim reserves is imprecise due to a
number of variables. These variables are affected by both internal and external
events such as changes in claims handling procedures, inflation, judicial trends
and legislative changes. Many of these items are not directly quantifiable,
particularly on a prospective basis. Additionally, there may be significant
reporting lags between the occurrence of the insured event and the time it is
actually reported to the insurer. TAP continually refines reserve estimates in a
regular ongoing process as experience develops and further claims are reported
and settled. TAP reflects adjustments to reserves in the results of operations
in the periods in which the estimates are changed. In establishing reserves, TAP
takes into account estimated recoveries for reinsurance, salvage and
subrogation.
TAP derives estimates for unreported claims and development on
reported claims principally from actuarial analyses of historical patterns of
claims development by accident year for each line of business and market
segment. Similarly, TAP derives estimates of unpaid claim adjustment expenses
principally from actuarial analyses of historical development patterns of the
relationship of claim adjustment expenses to losses for each line of business
and market segment. For a description of TAP's reserving methods for
environmental and asbestos claims, see "-- Environmental, Asbestos and
Cumulative Injury Claims."
Discounting. The liability for losses for certain long-term
disability payments under workers' compensation insurance and workers'
compensation excess insurance has been discounted using a maximum interest rate
of 5%. At December 31, 1996, 1995 and 1994 the combined amounts of discount for
TAP were $1.012 billion, $1.206 billion and $1.120 billion, respectively.
For a reconciliation of beginning and ending property and casualty
insurance claims and claim adjustment expense reserves of the Company for each
of the last three years, see Note 11 of Notes to Consolidated Financial
Statements.
The following table sets forth the year-end reserves from 1986
through 1996 and the subsequent changes in those reserves, presented on a
historical basis for TAP. Accordingly, the original estimates, cumulative
amounts paid and reestimated reserves in the table for the years 1986-1995 have
not been restated to include Aetna P&C's business. Beginning in 1996, the table
includes the reserve activity of Aetna P&C. The data in the table are presented
in accordance with reporting requirements of the Commission. Care must be taken
to avoid misinterpretation by those unfamiliar with such information or familiar
with other data commonly reported by the insurance industry. The following data
is not accident year data, but rather a display of 1986-1996 year-end reserves
and the subsequent changes in those reserves.
For instance, the "cumulative deficiency or redundancy" shown in the
following table for each year represents the aggregate amount by which original
estimates of reserves as of that year-end have changed in subsequent years.
Accordingly, the cumulative deficiency for a year relates only to reserves at
that year-end and such amounts are not additive. Expressed another way, if the
original reserves at the end of 1986 included $4 million for a loss that is
finally settled in 1996 for $5 million, the $1 million deficiency (the excess of
the actual
32
<PAGE> 35
settlement of $5 million over the original estimate of $4 million) would be
included in the cumulative deficiencies in each of the years 1986-1995 shown in
the following table.
Certain factors may distort the re-estimated reserves and cumulative
deficiency or redundancy shown in the following table. For example, a
substantial portion of the cumulative deficiencies in each of the years
1986-1996 arises from claims on policies written prior to the mid-1970s
involving liability exposures such as environmental, asbestos and cumulative
injury claims. In the post-1984 period, TAP has developed more stringent
underwriting standards and policy exclusions and has significantly contracted or
terminated the writing of such risks. See "-- Environmental, Asbestos and
Cumulative Injury Claims." General conditions and trends that have affected the
development of these liabilities in the past will not necessarily recur in the
future.
Other factors that affect the data in the following table include
the discounting of workers' compensation reserves and the use of retrospectively
rated insurance policies. To the extent permitted under applicable accounting
practices, workers' compensation reserves are discounted to reflect the time
value of money, due to the relatively long time period over which these claims
are to be paid. Apparent deficiencies will continue to occur as the discount on
these workers' compensation reserves is accreted at the appropriate interest
rates. Also, a significant portion of National Accounts business is underwritten
with retrospectively rated insurance policies in which the ultimate loss
experience is primarily borne by the insured. Increases in loss experience
result in an increase in reserves, and an offsetting increase in amounts
recoverable from insureds. These amounts recoverable mitigate the impact of the
cumulative deficiencies but are not reflected in the following table.
Retrospective rating is particularly significant for National Accounts business
for workers' compensation, and to a lesser extent in general liability and
commercial automobile coverages. This mechanism affords TAP a significant
financial protection against adverse development on a large block of net
reserves.
Because of these and other factors, it is difficult to develop
meaningful extrapolation of estimated future redundancies or deficiencies in
loss reserves from the data in the following table.
The differences between the reserves for claims and claim adjustment
expenses shown in the following table, which is prepared in accordance with
GAAP, and those reported in the annual statements of TAP filed with state
insurance departments, which are prepared in accordance with statutory
accounting practices, were: $14 million, $(7) million and $(26) million for the
years 1996, 1995 and 1994, respectively.
33
<PAGE> 36
<TABLE>
<CAPTION>
Year Ended December 31,
1986(a) 1987(a) 1988(a) 1989(a) 1990(a) 1991(a) 1992(a) 1993(a) 1994(a) 1995(a) 1996(b)
------------------------------------------------------------------------------------------
(in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reserves for Loss and LAE
Originally Estimated $ 6,658 $ 7,644 $ 8,116 $ 8,947 $ 9,239 $ 9,406 $ 9,873 $10,190 $10,251 $10,102 $21,816
Cumulative amount paid as of
One year later 1,839 2,376 2,147 2,430 2,419 2,135 2,206 1,900 1,852 1,521
Two years later 3,261 3,631 3,632 3,992 3,932 3,584 3,554 3,221 2,888
Three years later 4,075 4,648 4,706 5,095 4,993 4,594 4,561 3,988
Four years later 4,760 5,402 5,487 5,878 5,755 5,375 5,160
Five years later 5,303 5,978 6,080 6,479 6,351 5,851
Six years later 5,735 6,443 6,555 6,966 6,746
Seven years later 6,109 6,829 6,963 7,304
Eight years later 6,443 7,176 7,262
Nine years later 6,751 7,445
Ten years later 6,991
Reserves reestimated as of
One year later 6,799 7,858 8,292 9,099 9,358 9,446 10,013 10,151 9,942 9,848
Two years later 7,078 8,051 8,497 9,220 9,470 9,755 10,112 10,116 9,766
Three years later 7,292 8,254 8,698 9,408 9,897 10,038 10,142 9,990
Four years later 7,569 8,497 8,912 9,953 10,325 10,154 10,148
Five years later 7,765 8,746 9,488 10,421 10,478 10,251
Six years later 8,021 9,333 9,970 10,616 10,614
Seven years later 8,636 9,813 10,150 10,755
Eight years later 9,075 9,966 10,306
Nine years later 9,245 10,131
Ten years later 9,366
Cumulative Deficiency (Redundancy) 2,708 2,487 2,190 1,808 1,375 845 275 (200) (485) (254)
Gross liability--end of year $13,805 $13,872 $14,715 $29,967
Reinsurance recoverables 3,615 3,621 4,613 8,151
----------------------------------
Net liability--end of year $10,190 $10,251 $10,102 $21,816
==================================
Gross reestimated liability--latest $13,673 $13,717 $14,384
Reestimated reinsurance
recoverables--latest 3,683 3,951 4,536
------- ------- -------
Net reestimated liability--latest $ 9,990 $ 9,766 $ 9,848
======= ======= =======
Gross cumulative deficiency (redundancy) $ (132) $ (155) $ (331)
======= ======= =======
</TABLE>
(a) Reflects reserves of Travelers P&C, excluding Aetna P&C reserves which
were acquired on April 2, 1996. Accordingly, the reserve development (net
reserves for loss and LAE recorded at the end of the year, as originally
estimated, less net reserves reestimated as of subsequent years) relates
only to the operations of Travelers P&C and does not include Aetna P&C.
(b) Includes Aetna P&C gross reserves of $16,775 million and net reserves of
$11,752 million acquired on April 2, 1996 and subsequent development
thereon.
Statutory Combined Ratio and Other Information
The following table sets forth the statutory loss and LAE ratios,
underwriting expense ratios and combined ratios for the periods indicated for
the Company.
The statutory combined ratio is an industry measurement of the
results of property and casualty insurance underwriting. This ratio is the sum
of the ratio of incurred losses and loss adjustment expenses to net premiums
earned (the "loss and LAE ratio"), the ratio of underwriting expenses incurred
to net premiums written (the "underwriting expense ratio") and, where
applicable, the ratio of dividends to policyholders to net premiums earned. A
combined ratio under 100% generally indicates an underwriting profit; a combined
ratio over 100% generally indicates an underwriting loss. However, investment
income, federal income taxes and other non-underwriting income (e.g., service
fee income) or expenses are not reflected in the combined ratio. The
profitability of property and casualty insurance
34
<PAGE> 37
companies depends on income from underwriting, investment and service
operations. Lines of business where claims are paid out over a longer period of
time, such as workers' compensation, also provide investment income over a
longer period of time and therefore can be profitable at higher combined ratios
than lines where claims are paid out over a shorter period. Insurers with a high
proportion of long-tail policies will generally have higher combined ratios than
insurers with more short-tail business.
The ratios shown in the table below are computed based upon
statutory accounting practices, not GAAP. For information on GAAP combined
ratios, see Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Statutory Combined Ratios
Year Ended December 31,
------------------------------------
1996 1995 1994
-------- -------- --------
Commercial Lines:
Loss and LAE ratio 95.6% 80.6% 100.0%
Underwriting expense ratio 32.5 24.4 24.7
Combined ratio before
policyholder dividends 128.1 (1) 105.0 124.7 (2)
Combined ratio 128.8 106.3 123.0
Personal Lines:
Loss and LAE ratio 68.7 74.5 71.0
Underwriting expense ratio 28.9 29.9 29.4
Combined ratio 97.6 (3) 104.4 100.4
Total:
Loss and LAE ratio 85.2 78.2 88.7
Underwriting expense ratio 31.2 26.4 26.5
Combined ratio before
policyholder dividends 116.4 104.6 115.2
Combined ratio 116.9 105.4 114.1
- ----------
(1) Includes the effect of charges associated with the Acquisition and also
includes statutory charges made to conform accounting policies and TAP
strategies in connection with the Acquisition (but not for GAAP reporting
purposes due to purchase accounting). The combined ratio excluding such
charges was 109.3%.
(2) Includes statutory reserve increases for environmental claims and a
reduction of ceded reinsurance balance amounting to $225 million by TAP.
The combined ratio excluding this item was 114.2%.
(3) Includes the effect of TAP's review of reserves associated with the
Acquisition. The combined ratio excluding this item was 100.1%.
35
<PAGE> 38
The following table sets forth information regarding the premium to
surplus ratios of TAP. For informational purposes only, the table includes Aetna
P&C for all periods presented.
Schedule of Premium to Surplus Ratios (Statutory Basis)(1)
Year Ended December 31,
---------------------------------
1996 1995 1994
-------- -------- ---------
(Dollars in millions)
Net written premiums $7,343 $7,701 $7,981
Capital and surplus 5,423 5,231 4,659
Ratio of net written premiums to capital
and surplus 1.35x 1.47x 1.71x
- ----------
(1) Including accident and health business.
Environmental, Asbestos and Cumulative Injury Claims
Environmental, asbestos and cumulative injury claims are segregated
from other claims and are handled separately by TAP's Special Liability Group, a
special unit staffed by dedicated legal, claim, finance and engineering
professionals.
Environmental Claims
As a result of various state and federal regulatory efforts aimed at
environmental remediation, the insurance industry has been, and continues to be,
involved in extensive litigation involving policy coverage and liability issues.
The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA") was first enacted in 1980, and significantly expanded in 1984. CERCLA
enables private parties and the federal and state governments to take action
with respect to releases and threatened releases of hazardous substances and to
recover their response costs from certain liable parties or such parties may be
ordered to undertake remedial action directly. Liability under CERCLA may be
joint and several with other responsible persons. In addition to the regulatory
pressures, TAP believes that certain court decisions have expanded insurance
coverage beyond the original intent of the insurers and insureds, frequently
involving policies that were issued prior to the mid-1970s. The results of court
decisions affecting the industry's coverage positions continue to be
inconsistent. Accordingly, the ultimate responsibility and liability for
environmental remediation costs remain uncertain.
TAP continues to receive claims alleging liability exposures arising
out of insureds' alleged disposition of toxic substances. These claims when
submitted rarely indicate the monetary amount being sought by the claimant from
the insured and TAP does not keep track of the monetary amount being sought in
those few claims which indicated such a monetary
36
<PAGE> 39
amount.
TAP's reserves for environmental claims are not established on a
claim-by-claim basis. An aggregate bulk reserve is carried for all of TAP's
environmental claims that are in the dispute process, until the dispute is
resolved. This bulk reserve is established and adjusted based upon the aggregate
volume of in-process environmental claims and TAP's experience in resolving such
claims. Environmental loss and loss expense reserves of TAP at December 31, 1996
were $1.242 billion, net of reinsurance of $127 million. Approximately 12% of
such loss and loss expense reserves (i.e., approximately $146 million) were case
reserves for resolved claims. The balance, approximately 88% of the net
aggregate reserve (i.e., approximately $1.096 billion), is carried in a bulk
reserve and includes incurred but not yet reported environmental claims for
which TAP has not received any specific claims.
TAP's reserving methodology is preferable to one based on
"identified claims" since the resolution of environmental exposures by TAP
generally occurs on an insured-by-insured basis as opposed to a claim-by-claim
basis. The nature of the resolution is through coverage litigation, which often
pertains to more than one claim, as well as through a settlement with an
insured. Generally, the settlement between TAP and the insured extinguishes any
obligation TAP may have under any policy issued to the insured for past, present
and future environmental liabilities. This form of settlement is commonly
referred to as a "buy-back" of policies for future environmental liability.
Additional provisions of these agreements include the appropriate indemnities
and hold harmless provisions to protect TAP. TAP's general purpose in executing
such agreements is to reduce its potential environmental exposure and eliminate
both risks presented by coverage litigation with the insured and the cost of
such litigation.
The reserving methodology includes an analysis by TAP of the
exposure presented by each insured and the anticipated cost of resolution, if
any, for each insured. This analysis is completed by TAP on a quarterly basis.
In the course of its analysis, an assessment of the probable liability,
available coverage, judicial interpretations and historical value of similar
exposures is considered by TAP. In addition, due consideration is given to the
many variables presented, such as the nature of the alleged activities of the
insured at each site; the allegations of environmental damage at each site; the
number of sites; the total number of potentially responsible parties at each
site; the nature of environmental harm and the corresponding remedy at a site;
the nature of government enforcement activities at each site; the ownership and
general use of each site; the overall nature of the insurance relationship
between TAP and the insured; the identification of other insurers; the potential
coverage available, if any, including number of years of coverage, if any; and
the applicable law in each jurisdiction. Analysis of these and other factors,
including the potential for future claims, results in the establishment of the
bulk reserve.
The duration of TAP's investigation and review of such claims and
the extent of time necessary to determine an appropriate estimate, if any, of
the value of the claim to TAP, varies significantly and is dependent upon a
number of factors. These factors include, but are not limited to, the
cooperation of the insured in providing claim information, the pace of
underlying litigation or claim processes, the pace of coverage litigation
between the insured and TAP and the willingness of the insured and TAP to
negotiate, if appropriate, a resolution of any dispute between them pertaining
to such claims. Since the foregoing factors vary from claim to claim and insured
by insured, TAP cannot provide a meaningful average of the duration of an
environmental claim. However, based upon TAP's experience in resolving such
claims, the duration may vary from months to several years.
The property and casualty insurance industry does not have a
standard method of calculating claim activity for environmental losses.
Generally for environmental claims, Travelers P&C establishes a claim file for
each insured on a per site, per claimant basis. If there is more than one
claimant such as a federal and a state agency, this method will result in two
claims being set up for a policyholder at that one site. Similarly, if one
hundred claimants file a lawsuit against ten policyholders alleging injury as a
result of the discharge of wastes or pollutants, one thousand claims would be
established. Travelers P&C adheres to this method
37
<PAGE> 40
of calculating claim activity on all environmental-related claims, whether such
claims are tendered on primary, excess or umbrella policies.
As of December 31, 1996, Travelers P&C had approximately 30,800
pending environmental-related claims tendered by 664 active policyholders. The
pending environmental-related claims represent federal or state EPA-type claims
as well as plaintiffs' claims alleging bodily injury and property damage due to
the discharge of waste or pollutants. In 1996, the pending inventory increased
by approximately 20,000 claims as a result of several lawsuits being filed in
the states of Louisiana and Texas. These lawsuits, filed against one or more
policyholders of Travelers P&C, allege that the plaintiffs were injured or
damaged as a result of either alleged waste disposal or the alleged release of
deleterious substances from ongoing business operations which have taken place
near the plaintiffs' residences. Claims of this nature have historically been
considered in the level of TAP's environmental reserves. To date, in total
Travelers P&C has resolved environmental-related claims on behalf of 1,628
policyholders.
TAP is preparing a claims system conversion which when completed
will apply Travelers P&C's method of establishing claim files to Aetna P&C's
environmental-related claims. TAP anticipates that this process should be
completed in 1997. As of December 31, 1996, Aetna P&C had pending
environmental-related claims tendered by approximately 948 active policyholders.
Approximately 129 of these 948 active policyholders are also included in the 664
active Travelers P&C policyholders. Aetna P&C's policyholders, like those of
Travelers P&C, have tendered both EPA-type claims and individual claims alleging
injury or damage as a result of the discharge of wastes or pollutants. To date,
Aetna P&C has resolved environmental-related claims on behalf of 1,870
policyholders.
To date, TAP generally has been successful in resolving its coverage
litigation and continues to reduce its potential exposure through favorable
settlements with certain insureds. These settlement agreements with certain
insureds are based on the variables presented in each piece of coverage
litigation. Generally the settlement dollars paid in disputed coverage claims
are a percentage of the total coverage sought by such insureds.Based upon TAP's
reserving methodology and the experience of its historical resolution of
environmental exposures, it believes that the environmental reserve provision is
appropriate. As of December 31, 1996, TAP for approximately $1 billion, has
resolved the environmental liabilities presented by 3,498 of the 4,981
policyholders who have tendered environmental claims to TAP. This resolution
comprises 70% of the policyholders who have tendered such claims. TAP has
reserves of approximately $950 million included in its bulk reserves relating to
the remaining 1,483 policyholders (30% of the total) with unresolved
environmental claims, as well as for any other policyholder which may tender an
environmental claim in the future.
38
<PAGE> 41
Asbestos Claims
In the area of asbestos claims, TAP believes that the property and
casualty insurance industry has suffered from judicial interpretations that have
attempted to maximize insurance availability from both a coverage and liability
standpoint far beyond the intent of the contracting parties. These policies
generally were issued prior to the 1980s. TAP continues to receive asbestos
claims alleging insureds' liability from claimants' asbestos-related injuries.
These claims, when submitted, rarely indicate the monetary amount being sought
by the claimant from the insured and TAP does not keep track of the monetary
amount being sought in those few claims which indicated such a monetary amount.
Originally the cases involved mainly plant workers and traditional asbestos
manufacturers and distributors. However, in the mid-1980s, a new group of
plaintiffs, whose exposure to asbestos was less direct and whose injuries were
often speculative, began to file lawsuits in increasing numbers against the
traditional defendants as well as peripheral defendants who had produced
products that may have contained small amounts of some form of encapsulated
asbestos. These claims continue to arise and on an individual basis generally
involve smaller companies with smaller limits of potential coverage.
Also, there has emerged a group of non-product claims by plaintiffs,
mostly independent labor union workers, mainly against companies, alleging
exposure to asbestos while working at these companies' premises. In addition,
various insurers, including TAP, remain defendants in an action brought in
Philadelphia regarding potential consolidation and resolution of future asbestos
bodily injury claims.
In summary, various classes of asbestos defendants, such as major
product manufacturers, peripheral and regional product defendants as well as
premises owners, are tendering asbestos-related claims to the industry. Because
each insured presents different liability and coverage issues, TAP evaluates
those issues on an insured-by-insured basis.
TAP's evaluations have not resulted in any meaningful data from
which an average asbestos defense or indemnity payment may be determined. The
varying defense and indemnity payments made by TAP on behalf of its insureds
have also precluded TAP from deriving any meaningful data by which it can
predict whether its defense and indemnity payments for asbestos claims (on
average or in the aggregate) will remain the same or change in the future. Based
upon TAP's experience with asbestos claims, the duration period of an asbestos
claim from the date of submission to resolution is approximately two years.
At December 31, 1996, asbestos claims reserves of TAP were $1.073
billion, net of reinsurance of $370 million. Approximately 25% of the net
aggregate reserve (i.e., approximately $263 million) is for pending asbestos
claims. The balance, approximately 75% (i.e., approximately $810 million), of
the net asbestos reserves represents incurred but not yet reported losses for
which TAP has not received any specific claims.
39
<PAGE> 42
Uncertainty Regarding Adequacy of Environmental and Asbestos Reserves
It is difficult to estimate the reserves for environmental and
asbestos-related claims due to the vagaries of court coverage decisions,
plaintiffs' expanded theories of liability, the risks inherent in major
litigation and other uncertainties. Conventional actuarial techniques are not
used to estimate such reserves.
For environmental claims, TAP estimates its financial exposure and
establishes reserves based upon an analysis of its historical claim experience
and the facts of the individual underlying claims. The unique facts presented in
each claim are evaluated individually and collectively. Due consideration is
given to the many variables presented in each claim, as discussed above.
The following factors are evaluated in projecting the ultimate
reserve for asbestos-related claims: available insurance coverage; limits and
deductibles; an analysis of each policyholder's potential liability;
jurisdictional involvement; past and projected future claim activity; past
settlement values of similar claims; allocated claim adjustment expense;
potential role of other insurance, and applicable coverage defenses, if any.
Once the gross ultimate exposure for indemnity and allocated claim adjustment
expense is determined for a policyholder by policy year, a ceded projection is
calculated based on any applicable facultative and treaty reinsurance. In
addition, a similar review is conducted for asbestos property damage claims.
However, due to the relatively minor claim volume, these reserves have remained
at a constant level.
As a result of these processes and procedures, the reserves carried
for environmental and asbestos claims at December 31, 1996 are the Company's
best estimate of ultimate claims and claim adjustment expenses based upon known
facts and current law. However, the environment surrounding the final resolution
of these claims continues to change. Currently, it is not possible to predict
changes in the legal and legislative environment and their impact on the future
development of asbestos and environmental claims. Such development will be
affected by future court decisions and interpretations and changes in Superfund
and other legislation. Because of these future unknowns, additional liabilities
may arise for amounts in excess of the current reserves. These additional
amounts, or a range of these additional amounts, cannot now be reasonably
estimated, and could result in a liability exceeding reserves by an amount that
would be material to the Company's operating results in a future period.
However, the Company believes that it is not likely that these claims will have
a material adverse effect on the Company's financial condition or liquidity.
Cumulative Injury Other Than Asbestos
Cumulative injury other than asbestos ("CIOTA") claims are generally
submitted to TAP under general liability policies and often involve an
allegation by a claimant against an insured that the claimant has suffered
injuries as a result of long-term or continuous exposure
40
<PAGE> 43
to potentially harmful products or substances. Such potentially harmful products
or substances include, but are not limited to, lead paint, pesticides,
pharmaceutical products, silicone-based personal products, solvents and other
deleterious substances.
Due to claimants' allegations of long-term bodily injury in CIOTA
claims, numerous complex issues regarding such claims are presented. The
claimants' theories of liability must be evaluated, evidence pertaining to a
causal link between injury and exposure to a substance must be reviewed, the
potential role of other causes of injury must be analyzed, the liability of
other defendants must be explored, and assessment of a claimant's damages must
be made and the law of the jurisdiction must be applied. In addition, TAP must
review the number of policies issued by TAP to the insured and whether such
policies are triggered by the allegations, the terms and limits of liability of
such policies, the obligations of other insurers to respond to the claim, and
the applicable law in each jurisdiction.
To the extent disputes exist between TAP and a policyholder
regarding the coverage available for CIOTA claims, TAP resolves the disputes,
where feasible, through settlements with the policyholder or through coverage
litigation. Generally, the terms of a settlement agreement set forth the nature
of TAP's participation in resolving CIOTA claims, the scope of coverage to be
provided by TAP and contain the appropriate indemnities and hold harmless
provisions to protect TAP. These settlements generally eliminate uncertainties
for TAP regarding the risks extinguished, including the risk that losses would
be greater than anticipated due to evolving theories of tort liability or
unfavorable coverage determinations. TAP's approach also has the effect of
determining losses at a date earlier than would have occurred in the absence of
such settlement agreements. On the other hand, in cases where future
developments are favorable to insurers, this approach could have the effect of
resolving claims for amounts in excess of those that would ultimately have been
paid had the claims not been settled in this manner. No inference should be
drawn that because of TAP's method of dealing with CIOTA claims, its reserves
for such claims are more conservatively stated than those of other insurers.
Aetna P&C did not distinguish CIOTA from other general liability
claims or treat CIOTA claims as a special class of claims. In addition, there
were substantial differences in claim approach and resolution between TAP and
Aetna P&C regarding CIOTA claims.
During the second quarter, TAP completed its review of Aetna P&C's
exposure to CIOTA claims in order to determine an appropriate level of reserves
using TAP's approach as described above. Based on the results of that review,
TAP's general liability insurance reserves were increased $360 million, net of
reinsurance ($234 million after tax).
At December 31, 1996, CIOTA claims reserves of TAP were $1.114
billion, net of reinsurance of $446 million. Approximately 19% of the net
aggregate reserve (i.e., approximately $215 million) is for pending CIOTA
claims. The balance, approximately 81%
41
<PAGE> 44
(i.e., approximately $899 million), of the net CIOTA reserves represents
incurred but not yet reported losses for which TAP has not received any specific
claims.
Insurance Pools
Most of TAP's insurance subsidiaries are members of one of three
separate intercompany property and casualty reinsurance pooling arrangements:
the Travelers Indemnity pool, the Aetna Insurance pool and the Gulf pool. Each
of these insurance pools permits the participating companies to rely on the
capacity of the entire pool rather than on its own capital and surplus. Under
the arrangements of each insurance pool, the members share substantially all
insurance business that is written and prorate the combined premiums, losses and
expenses.
Competition and Regulation
For a description of competition and regulation relating to the
Company's property and casualty insurance business, see "Insurance Services
General" at the end of the description of the Life Insurance Services segment.
Investments
For information on the investment portfolios of the Company's
property and casualty insurance business, see "Insurance Services - General" at
the end of the description of the Life Insurance Services segment.
LIFE INSURANCE SERVICES
The Company's Life Insurance Services segment includes the
operations of The Travelers Insurance Company ("TIC"), which was incorporated in
1863, The Travelers Life and Annuity Company ("TLAC"), Transport Life Insurance
Company ("Transport Life") and its affiliates through the end of the third
quarter of 1995 (collectively, "Travelers Life and Annuity") and the Primerica
Financial Services group of companies ("PFS"), including Primerica Life
Insurance Company ("Primerica Life"). On September 29, 1995, the Company
distributed all of the outstanding shares of common stock of Transport Holdings
Inc., the indirect parent of Transport Life, to the Company's stockholders. With
$43.0 billion of assets at December 31, 1996, the Company believes that TIC,
TLAC and Primerica Life together constitute one of the largest stock life
insurance groups in the United States as measured by assets. For information
concerning the Company's credit-related insurance businesses, see "Consumer
Finance Services."
42
<PAGE> 45
Primerica Financial Services
Principal Markets and Methods of Distribution
The business operations of PFS involve the sale of insurance, mutual
funds and other financial products, and consist of an affiliated group of
companies engaged in (i) the underwriting and administration of individual term
life insurance throughout the United States and in Canada and (ii) securities
brokerage, consisting primarily of mutual fund sales. The PFS sales force,
composed of more than 86,000 independent agents, primarily markets term life
insurance of Primerica Life and certain other products of subsidiaries of the
Company, including certain loans offered by the Company's consumer finance
subsidiaries and other products approved by the Company. The domestic PFS sales
force also sells certain property-casualty insurance products of TAP and mutual
funds offered by Smith Barney. Because the great majority of the domestic
licensed sales force works on a part-time basis, a substantial portion of the
sales force is inactive from time to time.
Primerica Life and its subsidiaries, Primerica Life Insurance
Company of Canada and National Benefit Life Insurance Company ("NBL"), primarily
offer individual term life insurance. NBL provides statutory disability benefits
in New York, as well as direct response student term life insurance nationwide.
Primerica Life and its subsidiaries together are licensed to sell and market
term life insurance in all 50 states, the District of Columbia, Canada, Puerto
Rico, Guam, the U.S. Virgin Islands and the Northern Mariana Islands.
For information concerning PFS Investments Inc. ("PFS Investments"),
see "-- Mutual Funds and Asset Management."
Premium revenues, net of reinsurance, for PFS for the years ended
December 31, 1996, 1995 and 1994 were $1.030 billion, $1.012 billion and $962
million, respectively. The increase in premium revenues in recent years is
primarily attributable to the retention of in force business and the increase in
average premium per new policy sold. See "Insurance Services - General
- --Reinsurance" for a discussion of reinsurance.
43
<PAGE> 46
Life Insurance in Force
The following table provides a reconciliation of beginning and
ending life insurance in force for Primerica Life and subsidiaries, and related
statistical data for 1994-1996.
(in millions of dollars, except as noted)
Year Ended December 31,
--------------------------------------
1996 1995 1994
---- ---- ----
In force beginning of year $ 348,169 $ 334,972 $ 317,403
Additions 52,039 53,045 57,389
Terminations(1) (40,330) (39,848) (39,820)
--------- -------- --------
In force end of year $ 359,878 $ 348,169 $ 334,972
========= ========== =========
The amounts in force at end of
year are before reinsurance ceded
in the following amounts $ 134,330 $ 117,647 $ 94,930
========= ========= =========
At end of year:
Number of policies in force
PFS 2,141,800 2,115,600 2,075,600
NBL other individual lines 418,437 398,988 396,717
Average size of policy
in force (in dollars)
PFS $ 164,694 $ 161,125 $ 157,739
NBL other individual lines 17,055 18,154 19,078
- ----------
(1) Includes terminations due to death, surrenders and lapses.
AIDS-related claims, net of reinsurance, as a percentage of total
net life claims paid by Primerica Life in 1996, 1995 and 1994, were 5.9%, 7.1%
and 7.1%, respectively. Management believes that current pricing and reserves
make adequate provision for AIDS-related claim experience.
Mutual Funds and Asset Management
PFS Investments is a registered broker-dealer through which the PFS
sales force markets mutual funds and variable annuities. For the years ended
December 31, 1996, 1995 and 1994, PFS' total mutual fund sales were $2.327
billion, $1.551 billion and $1.622 billion, respectively. The PFS sales force
began marketing Smith Barney mutual funds through a
44
<PAGE> 47
separate distribution arrangement with PFS Distributors, Inc. in mid-1995 and in
March 1996 began selling The Concert Series-SM-. The Concert Series-SM- is a
group of mutual funds that invests in various Smith Barney mutual funds instead
of directly in stocks, bonds or other securities. Sales of Smith Barney mutual
funds accounted for approximately 24% and 2%, respectively, of PFS' total mutual
fund sales in 1996 and 1995. At December 31, 1996, approximately 27,500
independent agent members of the PFS sales force (including approximately 2,600
licensed in Canada only) were also independent registered securities
representatives of PFS Investments and/or PFSL Investments Canada Ltd.
PFS Investments is also the exclusive retail distributor of the
Common Sense-R- Trust mutual funds,(1) and certain of the Company's subsidiaries
provide underwriting, transfer agency and custodial services to these funds.
Sales of shares of the Common Sense-R- Trust funds accounted for approximately
27%, 39% and 42%, respectively, of total mutual funds sales by PFS for 1996,
1995 and 1994. In December 1994, the Company sold American Capital Management &
Research, Inc., a mutual fund company and the co-sponsor of the Common
Sense-R-Trust funds, to The Van Kampen Merritt Companies, Inc. ("VKM") and
purchased an equity interest in VKM's parent company. In October 1996, VKM's
parent was sold, and in connection with such sale, the Company sold its equity
interest in that company.
Travelers Life and Annuity
Principal Products
Travelers Life and Annuity offers fixed and variable deferred
annuities, payout annuities and term, universal and variable life and long-term
care insurance to individuals and small businesses. It also provides group
pension products, including guaranteed investment contracts, and group annuities
to employer-sponsored retirement and savings plans. Travelers Life and Annuity
views market specialization and distribution diversification as critical
components of profitability. It has updated its individual product portfolio to
include a range of competitively priced fixed and variable annuity, term,
universal and variable life and long-term care insurance products for its
customers.
Individual accumulation fixed and variable annuities, group
annuities and pension plan products are used for retirement funding purposes.
Variable annuities permit policyholders to direct retirement funds into a number
of separate accounts which offer various investment options. Individual payout
annuities are used for structuring settlements of certain indemnity claims and
making other payments to policyholders over a period of time.
Guaranteed investment contracts, which provide a guaranteed return
on investment, continue to be a popular investment choice for employer-sponsored
retirement and savings
- ----------
(1) Common Sense is a registered trademark of Van Kampen/American Capital Asset
Management, Inc. ("VK/ACAM").
45
<PAGE> 48
plans. Group annuities purchased by employer sponsored plans fulfill retirement
obligations to individual employees.
Individual life insurance provides protection against financial loss
due to death. Life insurance is also used to meet estate, business planning and
retirement needs.
Long-term care insurance provides income and asset protection against
the high costs of care associated with home health, assisted living and nursing
home care. Travelers Life and Annuity ceased writing disability income insurance
in the first quarter of 1995.
The following table sets forth written premiums, net of reinsurance,
and deposits for the Travelers Life and Annuity unit.
Premiums and Deposits
(in millions)
Year Ended December 31,
---------------------------
1996 1995 1994
---- ---- ----
Premiums
Individual life $ 122 $ 124 $ 124
Long-term care 128 88 61
Individual accident and health(1) 24 200 273
Payout annuities 76 90 92
----- ----- -----
Total premiums 350 502 550
----- ----- -----
Deposits
Universal life insurance 169 149 162
Annuities
Individual fixed accumulation 621 692 569
Individual variable accumulation(2) 1,370 956 693
Individual payout 44 38 26
Guaranteed investment contracts(3) 764 681 347
Group separate accounts and managed funds(4) 276 362 747
Other fixed funds 186 115 119
Corporate-owned life insurance(5) 30 91 -
----- ----- -----
Total deposits 3,460 3,084 2,663
----- ----- -----
Total premiums and deposits $3,810 $3,586 $3,213
===== ===== =====
- ----------
(1) The declines in 1995 and 1996 reflect the Company's distribution of
Transport Holdings Inc., the indirect parent of Transport Life Insurance
Company, to the Company's stockholders in September 1995.
(2) The increase in individual variable accumulation deposits reflects
successful introduction of variable annuities in the Smith Barney
distribution network and other distribution initiatives.
(3) In 1994, TIC adopted a more selective approach to issuing new contracts.
The 1996 and 1995 increases reflect successful implementation of the new
strategy with both existing and new customers, and also was helped by
ratings upgrades during those years.
<PAGE> 49
(4) The 1996, 1995 and 1994 deposits include $146 million, $200 million and
$512 million, respectively, of deposits relating to the transfer in house
of pension fund assets previously managed externally.
46
<PAGE> 50
(5) TIC is not currently marketing corporate owned life insurance. 1996 and
1995 deposits are attributable to contracts previously issued by the
Company's Managed Care and Employee Benefits Operations ("MCEBO") (which
were sold in 1995) and transferred to Travelers Life and Annuity effective
January 1, 1995. For 1994, the premiums and deposits on this business were
$187 million and were reported in the Company's MCEBO unit.
For information about reinsurance, see "Insurance Services - General
- -- Reinsurance."
Principal Markets and Methods of Distribution
TIC is licensed to sell and market its individual products in all 50
states, the District of Columbia, Puerto Rico, Guam, the Bahamas and the U.S.
and British Virgin Islands. TLAC is licensed to sell and market life and annuity
products in 43 states and the District of Columbia.
Individual products are primarily marketed through The Copeland
Companies ("Copeland"), an indirect wholly owned subsidiary of TIC, Smith Barney
Financial Consultants and a core group of approximately 500 independent
agencies. Copeland is a captive sales organization of personal retirement
planning specialists focused primarily on the qualified periodic deferred
annuity marketplace, and accounted for approximately 39% of total individual
deferred annuity production in 1996 and 1995. Smith Barney's Financial
Consultants distribute Travelers Life and Annuity's non-qualified deferred
annuities and individual life and long-term care products. Smith Barney's share
of Travelers Life and Annuity's total individual deferred annuity production
increased from 33% in 1995 to 38% in 1996. The core group of over 500
professional life insurance agencies sold the majority of the individual life
and long term care business in 1996 and 1995 and accounted for 23% and 27%,
respectively, of individual annuity premiums and deposits. Tower Square
Securities, Inc. ("Tower Square Securities"), a wholly owned subsidiary of TIC,
is an introducing broker-dealer offering a full line of brokerage services.
Tower Square Securities facilitates the sale of individual variable life and
annuity insurance products by the independent agents of TIC.
TIC has also begun expanding the sale of its individual life and
long-term care products through other distribution networks. To accomplish this,
TIC has entered into strategic alliances with a select number of established
producers. In 1996, TIC acquired Travelers Net Plus, a long-term care specialty
distributor that markets primarily through targeted direct mailing. TIC also
formed TowerMark, a joint venture focused on recruiting and supporting agencies
serving high-end estate planning customers.
Group pension products and annuities are marketed by Travelers Life
and Annuity's salaried staff directly to plan sponsors and are also placed
through independent consultants and investment advisers. The major factors
affecting the pricing of these contracts are the economics of the capital
markets, primarily the interest rate environment, the availability of
appropriate investments and surplus required to support this business. The
pricing of products
47
<PAGE> 51
and services also reflects charges for expenses, mortality, profit and other
relevant financial factors such as credit risk.
Life Insurance in Force
The following table provides a reconciliation of beginning and ending
Travelers Life and Annuity life insurance in force and related statistical data
on a statutory basis for 1994 through 1996.
(in millions of dollars, except as noted)
Year Ended December 31,
------------------------------------
1996 1995 1994
---- ---- ----
In force beginning of year $ 49,179 $ 48,998 $ 44,909
Additions(1) 6,566 6,153 9,265
Terminations(2) (5,336) (5,972) (5,176)
------- ------- -------
In force end of year $ 50,409 $ 49,179 $ 48,998
======= ======= =======
The amounts in force at end of
year are before reinsurance ceded
in the following amounts $ 19,474 $ 16,806 $ 6,575
======= ======= =======
At end of year:
Number of policies in force(1) (3) 545,682 563,286 606,089
Average size of policy
in force (in dollars) $ 92,371 $ 87,307 $ 80,843
- ----------
(1) The 1995 decline reflects the de-emphasis of sales of certain lower-margin
life insurance products.
(2) Includes terminations due to death, surrenders and lapses. 1995
terminations also include policy terminations attributable to the
distribution of Transport Holdings Inc. to the Company's stockholders.
(3) The decline in 1996 and 1995 reflects the gradual run-off of old whole life
policies written several years ago at relatively low levels of per policy
insurance coverage. This was particularly offset by the sale of term and
universal life policies with significantly higher levels of insurance
coverage.
Insurance Reserves and Contractholder Funds
As life, long-term care and disability income insurance and annuity
premiums are received, Travelers Life and Annuity establishes policy benefit
reserves that reflect the present value of expected future obligations, net of
the present value of expected future net premiums. These reserves generally
reflect long-term fixed obligations to policyholders and are based on
assumptions as to interest rates, future mortality, morbidity, persistency and
expenses, with provision for adverse deviation. Policy benefit reserves, which
give appropriate recognition to reinsurance, are established based on factors
derived from past experience.
48
<PAGE> 52
Contractholder funds arise from the issuance of individual life
contracts that include an identifiable investment component, individual deferred
annuities and certain individual payout annuity contracts. Contractholder funds
generally are equal to deposits received and interest credited less withdrawals,
mortality charges and administrative expenses. Contractholder funds also include
receipts from the issuance of pension investment contracts.
AIDS-related claims paid by Travelers Life and Annuity in 1996, 1995
and 1994 were 3.4%, 1.6% and 2.1%, respectively, as a percentage of total life
claims paid, and 0.4%, 0.3% and 1.5%, respectively, as a percentage of total
health claims paid. Management believes that current pricing and reserves make
adequate provision for AIDS-related claim experience.
Competition and Regulation
For a description of competition and regulation relating to the
Company's life insurance businesses, see "Insurance Services - General."
Investments
For information on the investment portfolios of the Company's life
insurance businesses, see "Insurance Services - General."
INSURANCE SERVICES - GENERAL
Ratings
Insurance companies are rated by rating agencies to provide both
industry participants and insurance consumers with meaningful information on
specific insurance companies. Higher ratings generally indicate financial
stability and a strong ability to pay claims. These ratings are based upon
factors relevant to policyholders and are not directed toward protection of
investors. Such ratings are neither a rating of securities nor a recommendation
to buy, hold or sell any security and may be revised or withdrawn at any time.
Ratings focus primarily on the following factors: capital resources, financial
strength, demonstrated management expertise in the insurance business, credit
analysis, systems development, market segment position and growth opportunities,
marketing, sales conduct practices, investment operations, minimum
policyholders' surplus requirements and capital sufficiency to meet projected
growth, as well as access to such traditional capital as may be necessary to
continue to meet standards for capital adequacy.
The following table summarizes the current claims-paying and financial
strength ratings of the Company's subsidiaries, including Aetna Casualty and
Surety Company of America ("Aetna C&S of America"), and insurance pools by A.M.
Best, Duff & Phelps
49
<PAGE> 53
Corp., Moody's Investor's Service Inc. and Standard & Poor's Ratings Group. The
table also presents the position of each rating in the applicable agency's
rating scale.
<TABLE>
<CAPTION>
Moody's
A.M. Best Duff & Investor's Standard
Company Phelps Corp. Service Inc. & Poor's
------- ------------ ------------ --------
<S> <C> <C> <C> <C>
TIC A (3rd of 15) AA- (4th of 18) A1 (5th of 19) AA- (4th of 18)
TLAC A (3rd of 15) AA- (4th of 18) A1 (5th of 19) AA- (4th of 18)
Primerica Life A (3rd of 15) AA (3rd of 18) Aa3 (4th of 19) AA (3rd of 18)
Travelers Indemnity pool(1) A (3rd of 15) AA- (4th of 18) A1 (5th of 19) A+ (5th of 18)
Aetna Insurance pool(2) A- (4th of 15) A+ (5th of 18) A1 (5th of 19) A+ (5th of 18)
Gulf pool(3) A+(2nd of 15) - - AA (3rd of 18)
Aetna C&S of America A (3rd of 15) A+ (5th of 18) A1 (5th of 19) A+ (5th of 18)
</TABLE>
- ------------------------------
(1) The Travelers Indemnity Pool consists of The Travelers Indemnity Company,
The Phoenix Insurance Company, The Charter Oak Fire Insurance Company, The
Travelers Indemnity Company of Connecticut, The Travelers Indemnity Company
of America, The Travelers Indemnity Company of Missouri, The Travelers
Indemnity Company of Illinois, TravCo Insurance Company and The Travelers
Home and Marine Insurance Company.
(2) The Aetna Insurance Pool consists of The Aetna Casualty and Surety Company,
The Standard Fire Insurance Company, Aetna Casualty & Surety Company of
Illinois, The Farmington Casualty Company, The Automobile Insurance Company
of Hartford, Connecticut, Aetna Casualty Company of Connecticut, Aetna
Commercial Insurance Company, Aetna Insurance Company, Aetna Insurance
Company of Illinois and Aetna Personal Security Insurance Company.
(3) The Gulf pool consists of Gulf Insurance Company, Gulf Underwriters
Insurance Company, Select Insurance Company, Atlantic Insurance Company and
Gulf Group Lloyds.
Reinsurance
The Company reinsures a portion of the risks it underwrites in an effort to
control its exposure to losses, stabilize earnings and protect surplus. The
Company cedes to reinsurers a portion of these risks and pays premiums based
upon the risk and exposure of the policies subject to such reinsurance.
Reinsurance is subject to collectibility in all cases and to aggregate loss
limits. Although the reinsurer is liable to the Company to the extent of the
reinsurance ceded, the Company remains primarily liable as the direct insurer on
all risks reinsured. Reinsurance recoverables are reported after allowances for
uncollectible amounts. The Company also holds collateral, including escrow funds
and letters of credit, under certain reinsurance agreements. The Company
monitors the financial condition of reinsurers on an ongoing basis, and reviews
its reinsurance arrangements periodically. Reinsurers are selected based on
their financial condition, business practices and the price of their product
offerings. For additional information concerning reinsurance, see Note 12 of
Notes to Consolidated Financial Statements.
Property and Casualty Insurance
TAP utilizes a variety of reinsurance agreements to control its exposure to
large property and casualty losses. TAP utilizes the following types of
reinsurance: (i) facultative reinsurance, in which reinsurance is provided for
all or a portion of the insurance provided by a single policy and each policy
reinsured is separately negotiated; (ii) treaty reinsurance, in
50
<PAGE> 54
which reinsurance is provided for a specified type or category of risks; and
(iii) catastrophe reinsurance, in which the ceding company is indemnified for an
amount of loss in excess of a specified retention with respect to losses
resulting from a catastrophic event.
TAP's top five reinsurers, except Lloyd's of London ("Lloyd's") (which is
not rated), are rated "A" or higher by A.M. Best. The ratings and reinsurance
recoverable at December 31, 1996 follow (in millions):
Reinsurance
Reinsurer Recoverable A.M. Best Rating of Reinsurer
- --------------------------------------------------------------------------------
General Reinsurance Corporation $ 483 A++ highest of 15 ratings
American Re-Insurance Company 262 A+ 2nd highest of 15 ratings
Executive Risk Indemnity Inc. 193 A 3rd highest of 15 ratings
Employers Reinsurance Corporation 96 A++ highest of 15 ratings
NAC Reinsurance Corporation 75 A 3rd highest of 15 ratings
As of December 31, 1996, TAP had ceded to Lloyd's and General Reinsurance
Corporation, two reinsurers with which TAP does the most business, approximately
$488 million and $483 million, respectively, of insurance losses and loss
adjustment expenses. In 1996, Lloyd's restructured its operations with respect
to claims for years prior to 1993. The Company is in arbitration with
underwriters at Lloyd's in New York State to enforce reinsurance contracts with
respect to recoveries for certain asbestos claims that constitute a portion of
the total reinsurance recoverable referred to above. The dispute involves the
ability of the Company to aggregate asbestos claims under a market agreement
between Lloyd's and the Company or under the applicable reinsurance treaties.
See Item 3, "Legal Proceedings."
The outcome of the arbitration referred to above is uncertain and the
impact, if any, on collectibility of amounts recoverable by TAP from Lloyd's
cannot be quantified at this time. The Company believes that it is not likely
that the outcome could have a material adverse effect on the Company's operating
results, financial condition or liquidity.
TAP participates in pools with other insurers to provide capacity for
unique and high-valued risks such as exposures related to the aviation and
nuclear power industries. TAP's maximum net exposure to this type of business at
December 31, 1996 was $29 million per risk. For policies written on or after
January 1, 1997, the exposure was reduced to $15 million per risk.
At December 31, 1996, TAP had $9.7 billion in reinsurance recoverables. Of
this amount, $4.2 billion is for pools and associations which relate primarily
to workers' compensation service business and have the strength of the
participating insurance companies on a joint basis supporting these cessions. Of
the remaining $5.5 billion ceded to reinsurers at December 31, 1996, $497
million was environmental and asbestos-related and the remainder principally
reflects reinsurance in support of ongoing business. In addition, at December
31,
51
<PAGE> 55
1996, $465 million was collateralized by letters of credit against the asset.
The descriptions below relate to reinsurance arrangements of TAP in effect at
January 1, 1997.
Net Retention Policy. Currently, for third-party liability, including
automobile no-fault, the reinsurance agreements used by Commercial Accounts,
Select Accounts and Construction limit the net retention to a maximum of $4
million per insured, per occurrence. For Travelers Specialty, the reinsurance
agreements for third-party liability, including professional and healthcare
liability, limit TAP's net retention to a maximum of $4 million per policy, per
occurrence. Gulf Specialty utilizes various reinsurance mechanisms and has
limited its net retention to $4 million for any line of business. For commercial
property insurance, there is a $5 million maximum retention per insured with
100% reinsurance coverage for risks with higher limits. The reinsurance
agreement in place for workers' compensation policies written by Commercial
Accounts, Select Accounts, Construction, Travelers Specialty and some segments
of Alternative Markets covers 100% of each loss between $2 million and $10
million. For National Accounts, reinsurance arrangements are typically tiered,
or layered, such that only levels of risk acceptable to TAP are retained. The
reinsurance agreement in place for Personal Lines umbrella policies covers 100%
of each loss between $1 million and $5 million. The reinsurance agreements in
place for Personal Lines property policies covers 100% of each loss between $1
million and $6 million. For surety protection, Bond has reinsurance coverage for
95% of up to $50 million of liability in excess of $50 million of liability. In
addition, Bond's accident year results are protected by an aggregate excess of
loss treaty that provides 93.85% of approximately $52 million of reinsurance
coverage in excess of a $119 million retention.
Catastrophe Reinsurance. TAP utilizes reinsurance agreements with
nonaffiliated reinsurers to control its exposure to losses resulting from one
occurrence. For the accumulation of net property losses arising out of one
occurrence, reinsurance agreements cover 75% of total losses between $250
million and $650 million. For multiple workers' compensation losses arising from
a single occurrence, reinsurance agreements cover 100% of losses between $10
million and $250 million and, for workers' compensation losses caused by
property perils, reinsurance agreements cover 75% of losses between $250 million
and $650 million.
For commercial property insurance sold through Commercial Accounts, Select
Accounts, Construction and certain National Accounts, 10% of all losses are
reinsured in 1997, subject to an occurrence limitation of $275 million. For
Personal Lines homeowners insurance, in 1997, 25% of losses in states along the
East Coast are reinsured up to a maximum recovery of $180 million per
occurrence. The covered territory of this Homeowners Quota Share includes Maine,
New Hampshire, Massachusetts, Rhode Island, Connecticut, New York, New Jersey,
Delaware, Maryland, Virginia, North Carolina, South Carolina, Georgia, Florida
and Washington, D.C.
52
<PAGE> 56
Reinsurance Fund
TAP also participates in the Florida Hurricane Catastrophe Fund ("FHCF"),
which is a state-mandated catastrophe reinsurance fund. FHCF is primarily funded
by premiums from insurance companies that write residential property business in
Florida and, if insufficient, assessments on insurance companies that write
other property and casualty insurance, excluding workers' compensation. FHCF's
resources are limited to these contributions and to its borrowing capacity at
the time of a significant catastrophe. There can be no assurance that these
resources will be sufficient to meet the obligations of FHCF.
The Company's recovery of less than contracted amounts from FHCF could have
a material adverse effect on the Company's results of operations in the event of
a significant catastrophe in Florida.
Life Insurance
The Company's policy is to obtain reinsurance on individual life policies
for amounts above certain retention limits, which limits vary with age and
underwriting classification. During 1996, most new business was reinsured under
an 80%/20% quota share reinsurance program. Effective January 1, 1997, for
Primerica Life and its subsidiaries new business is reinsured under a 90%/10%
quota share reinsurance program. Retention on life insurance risks after
reinsurance remains up to a maximum of $1.5 million per insured for an ordinary
life risk, depending on the subsidiary involved, the type of policy, the year of
issue and the age of the insured. Other reinsurance arrangements are made from
time to time to cede or assume existing blocks of business.
Competition and Other Factors Affecting Growth
Property and Casualty Insurance
The property and casualty insurance industry is highly competitive in the
areas of price, service, product offerings, agent relationships and, in the case
of personal property and casualty business, method of distribution (i.e., use of
independent agents, captive agents and/or salaried employees). There are
approximately 3,400 property-casualty insurance companies in the United States.
Of those companies, approximately 800 operate in all or most states and write
the vast majority of the business in the industry while approximately 2,600
offer one or more personal or commercial lines property-casualty products
similar to those marketed by TAP. In addition, an increasing amount of
commercial risks are covered by purchaser self-insurance, large deductibles,
risk-purchasing groups, risk-retention groups and captive companies.
Commercial Lines. The insurance industry is represented in the commercial
lines marketplace by many insurance companies of varying size. The industry is
comprised of small
53
<PAGE> 57
local firms, large regional firms and large national firms, as well as
self-insurance programs or captive insurers. Market competition works to set the
price charged for insurance products and the level of service provided within
the insurance regulatory framework. Growth is driven by a company's ability to
provide insurance and services at a price that is reasonable and acceptable to
the customer. In addition, the marketplace is affected by available capacity of
the insurance industry as measured by policyholders' surplus. Surplus expands
and contracts primarily in conjunction with profit levels generated by the
industry. Growth in premium and service business is also measured by a company's
ability to retain existing customers and to attract new customers.
The National Accounts market is highly competitive. Competition is based
primarily on quality and service and, to a lesser extent, on the basis of price.
National Accounts business is generally written through national brokers and
regional agents. The Company also competes for state contracts to provide claims
and policy management services. These contracts, which generally have three-year
terms, are selected by state agencies through a bid process based on quality of
service and price. The Company has emerged as the largest assigned risk plan
service insurer in the industry with approximately 28% of the market in 1996.
The Commercial Accounts market is highly competitive. Commercial Accounts
business has historically been written through independent agents and brokers,
although some companies use direct writing. Competitors in this market are
primarily national property-casualty insurance companies willing to write most
classes of business using traditional products and pricing and, to a lesser
extent, regional insurance companies and companies that have developed niche
programs for specific industry segments. Companies compete on price, product
offerings, response time in policy issuance and claim and loss prevention
services. Additionally, reduced overhead and improved efficiency through
automation and response time to customer needs are key to success in this
market.
The Construction market has become a focused industry segment for several
large insurance companies. Construction market business is written through
agents and brokers. Insurance companies compete in this market based upon price,
product offering and claims service. The Company utilizes its specialized
underwriters and engineers who have extensive experience and knowledge of the
construction industry to work with agents and brokers to compete effectively in
this market.
The Select Accounts market is highly competitive and is typically written
through independent agents and, to a lesser extent, regional brokers. Both
national and regional property-casualty insurance companies compete in the
Select Accounts market which is generally comprised of low risk, "main street"
business customers. Risks are underwritten and priced using standard industry
practices and a combination of proprietary and standard industry product
offerings. Competition in this market is primarily based on price, product
offerings and response time in policy services. The Company has established a
strong
54
<PAGE> 58
marketing relationship with its distribution network and has provided it with
defined underwriting policies, competitive prices and efficient automated
environments.
The market in which Specialty Accounts competes includes small to mid-sized
niche companies that target certain lines of insurance and larger, multi-line
companies that focus on various segments of the Specialty Accounts market.
Specialty Accounts business is generally written through wholesale brokers and
retail agents and brokers throughout the United States. Gulf Specialty derives a
competitive advantage through its underwriting practices, low expense levels and
broad product offering base. Bond Specialty's reputation for clear, timely
decision-making, underwriting and industry expertise and strong producer and
customer relationships as well as its ability to offer its customers a full
range of financial services products, enable it to compete effectively. Its
ability to cross-sell Bond products to customers of National Accounts,
Commercial Accounts, Select Accounts and through other Travelers Group units
provides further competitive advantages for the Company.
Personal Lines. Personal lines insurance is written by hundreds of
insurance companies of varying sizes. Although national companies write the
majority of the business, the Company also faces competition from local or
regional companies which often have a competitive advantage because of their
expense structure or because they specialize in providing coverage to particular
risk groups. The Company believes that the principal competitive factors are
price, service, perceived stability of the insurer and name recognition. The
Company also competes for business within each of the independent agencies
representing it, because these agencies also offer policies of competing
independent agency companies. At the agency level, the Company believes that
competition is primarily based on the level of service, including claims
handling, level of automation and the development of long-term relationships
with the individual agents. The Company also competes with insurance companies
that use captive agents or salaried employees to sell their products. Because
these companies generally pay lower commissions than independent agency
companies, they may be able to generate business at a lower cost than the
Company. Due to this expense advantage, the direct writing companies have
gradually expanded their market share in recent years. However, in addition to
its traditional independent agency distribution, Personal Lines is pursuing a
number of initiatives to broaden its distribution of Personal Lines products,
including marketing through the PFS sales force, marketing to affinity groups
and establishing co-marketing arrangements with other insurers.
Life Insurance
The Company's life insurance businesses compete with national, regional and
local insurance companies. Competition is based upon price, product design and
services rendered to producers and policyholders. The insurance industry is
extremely competitive, in both price and services, and no single insurer is
dominant. The recent trend of consolidations in the industry has added to the
competitive environment. Travelers Life and Annuity believes that its focus on
market specialization and its diversified distribution network help it to
55
<PAGE> 59
compete effectively. PFS competes in the market by focusing on supplying an
integrated range of financial products to the middle-income market through a
formalized needs-based sales program.
In January 1995, the U.S. Supreme Court ruled that national banks may sell
annuities. To date, the decision has not had a significant impact on the
Company's annuity sales.
Savings banks also compete directly in the sale of life insurance in
Connecticut, Massachusetts and New York. Competition for the savings dollar
arises from entities such as banks, investment advisors, mutual funds and other
financial institutions.
PFS Investments is registered as a broker-dealer with the Commission, and
in all 50 states, the District of Columbia, Puerto Rico, the Virgin Islands and
Guam. Tower Square Securities is registered as a broker-dealer with the
Commission, and in all 50 states, Puerto Rico and the District of Columbia.
Similarly, Copeland Equities, Inc., a subsidiary of Copeland, is registered as a
broker-dealer with the Commission, in 49 states and the District of Columbia.
Each is subject to extensive regulation by those agencies and the securities
administrators of those jurisdictions, primarily for the benefits of its
customers, including minimum capital and licensing requirements. PFS Investments
faces competition not only from large financial services firms offering products
and services that cross traditional business boundaries, but also from insurance
companies, including other subsidiaries of the Company, offering life insurance
products with investment features.
Regulation
State Regulation
The Company's insurance subsidiaries are subject to regulation and
supervision in the various states and jurisdictions in which they transact
business. The extent of regulation varies but generally has its source in
statutes that delegate regulatory, supervisory and administrative authority to a
department of insurance of each state. The regulation, supervision and
administration relate, among other things, to the standards of solvency that
must be met and maintained, the licensing of insurers and their agents, the
nature of and limitations on investments, premium rates, restrictions on the
size of risks that may be insured under a single policy, reserves and provisions
for unearned premiums, losses and other obligations, deposits of securities for
the benefit of policyholders, approval of policy forms and the regulation of
market conduct including underwriting and claims practices. In addition, many
states have enacted variations of competitive rate-making laws which allow
insurers to set certain premium rates for certain classes of insurance without
having to obtain the prior approval of the state insurance department. State
insurance departments also conduct periodic examinations of the affairs of
insurance companies and require the filing of annual and other reports relating
to the financial condition of companies and other matters.
56
<PAGE> 60
At the present time, the Company's insurance subsidiaries are collectively
licensed to transact insurance business in all states, the District of Columbia,
Guam, Puerto Rico, and the U.S. Virgin Islands, as well as Canada, the United
Kingdom and the Northern Mariana Islands.
Although the Company is not regulated as an insurance company, it is the
owner of the capital stock of its insurance subsidiaries and as such is subject
to state insurance holding company statutes, as well as certain other laws, of
each of the states of domicile of its insurance subsidiaries. All holding
company statutes, as well as certain other laws, require disclosure and, in some
instances, prior approval of material transactions between an insurance company
and an affiliate. The holding company statutes, as well as certain other laws,
also require, among other things, prior approval of an acquisition of control of
a domestic insurer and the payment of extraordinary dividends or distributions.
The Company's insurance subsidiaries are subject to various state statutory
and regulatory restrictions in each company's state of domicile, which limit the
amount of dividends or distributions by an insurance company to its
stockholders. The ability of TIC and subsidiaries of TAP to pay dividends to the
Company in the future will depend on their statutory surplus, future earnings
and regulatory restrictions. A maximum of $507 million of statutory surplus is
available in 1997 for dividends from TIC to its parent without prior approval of
the Connecticut Insurance Department. Dividend payments to TAP from its
insurance subsidiaries are limited to $647 million in 1997 without prior
approval of the Connecticut Insurance Department.
The Company's principal insurance subsidiaries are domiciled in Connecticut
and Massachusetts. The insurance holding company law of Connecticut requires
notice to, and approval by, the state insurance commissioner for the declaration
or payment of any dividend, which together with other distributions made within
the preceding twelve months, exceeds the greater of (i) 10% of the insurer's
surplus or (ii) the insurer's net income for the twelve-month period ending the
preceding December 31st, in each case determined in accordance with statutory
accounting practices. Such declaration or payment is further limited by adjusted
unassigned funds (surplus), as determined in accordance with statutory
accounting practices. The insurance holding company laws of other states in
which the Company's insurance subsidiaries are domiciled generally contain
similar (although in certain instances somewhat more restrictive) limitations on
the payment of dividends.
Virtually all states require insurers licensed to do business in their
state to bear a portion of the loss suffered by certain insureds as a result of
the insolvency of other insurers. Depending upon state law, insurers can be
assessed an amount that is generally equal to between 1% and 2% of premiums
written for the relevant lines of insurance in that state each year to pay the
claims of an insolvent insurer. Most of these payments are recoverable through
premium rates, premium tax credits or policy surcharges. Significant increases
in assessments could limit the ability of the Company's insurance subsidiaries
to recover such assessments through tax credits. In addition, there have been
some legislative efforts to limit
57
<PAGE> 61
or repeal the tax offset provisions, which efforts, to date, have been generally
unsuccessful. These assessments may increase or decrease in the future depending
upon the rate of insolvencies of insurance companies.
The Company also participates in FHCF, which is a state-mandated
catastrophe reinsurance fund that provides reimbursement to insurers for a
portion of their future catastrophic hurricane losses. FHCF is primarily funded
by premiums from the insurance companies that write residential property
business in Florida and, if insufficient, assessments on insurance companies
that write other property and casualty insurance in Florida, excluding workers'
compensation. FHCF's resources are limited to these contributions and to its
borrowing capacity at the time of a significant catastrophe in Florida.
The Company's insurance subsidiaries are also required to participate in
various involuntary assigned risk pools, principally involving workers'
compensation and automobile insurance, which provide various insurance coverages
to individuals or other entities that otherwise are unable to purchase such
coverage in the voluntary market. Participation in these pools in most states is
generally in proportion to voluntary writings of related lines of business in
that state. The underwriting results of these pools traditionally have been
unprofitable, although the effect of their performance has been partially
mitigated in certain lines of insurance by the states' allowance of increases in
rates for business voluntarily written by pool participants in such states.
Earned premiums related to such pools and assigned risks for the Company were
$379 million, $315 million and $509 million in 1996, 1995 and 1994,
respectively. The related underwriting losses for the Company were $39 million,
$152 million and $300 million in 1996, 1995 and 1994, respectively.
Proposed legislation and regulatory changes have been introduced in the
states from time to time that would modify certain laws and regulations
affecting the financial services industry, including the provisions governing
relationships among insurance companies and agents, investment banks and
commercial banks. The potential impact of such legislation on the Company's
businesses cannot be predicted at this time.
In addition to state insurance laws, the Company's insurance subsidiaries
are also subject to general business and corporation laws, state securities
laws, consumer protection laws, fair credit reporting acts and other laws. The
insurance industry generally is exempt from federal antitrust laws because of
the application of the McCarran-Ferguson Act.
Insurance Regulations Concerning Change of Control
Many state insurance regulatory laws intended primarily for the protection
of policyholders contain provisions that require advance approval by state
agencies of any change in control of an insurance company that is domiciled (or,
in some cases, having such substantial business that it is deemed to be
commercially domiciled) in that state. The Company owns, directly or indirectly,
certain property and casualty insurance companies domiciled in the States of
Connecticut, Florida, Georgia, Illinois, Indiana, Massachusetts,
58
<PAGE> 62
Missouri, New Jersey and Texas and certain life insurance companies domiciled in
Connecticut, Massachusetts and Georgia. "Control" is generally presumed to exist
through the ownership of 10% or more of the voting securities of a domestic
insurance company or of any company that controls a domestic insurance company.
Any purchaser of shares of Common Stock representing 10% or more of the voting
power of the Company will be presumed to have acquired control of the Company's
domestic insurance subsidiaries unless, following application by such purchaser
in each insurance subsidiary's state of domicile, the relevant Insurance
Commissioner determines otherwise. In addition, many state insurance regulatory
laws contain provisions that require prenotification to state agencies of a
change in control of a nondomestic admitted insurance company in that state.
While such prenotification statutes do not authorize the state agency to
disapprove the change of control, such statutes do authorize issuance of a cease
and desist order with respect to the nondomestic admitted insurer if certain
conditions exist such as undue market concentration. Any future transactions
that would constitute a change in control of the Company would generally require
prior approval by the insurance departments of the states in which the Company's
insurance subsidiaries are domiciled or commercially domiciled and may require
preacquisition notification in those states that have adopted preacquisition
notification provisions and in which such insurance subsidiaries are admitted to
transact business.
Such requirements may deter, delay or prevent certain transactions
affecting the control of or the ownership of Common Stock, including
transactions that could be advantageous to the stockholders of the Company.
Insurance Regulatory Information System
The NAIC has developed a set of financial relationships or "tests" called
the Insurance Regulatory Information System ("IRIS") that were designed for
early identification of companies that may require special attention by
insurance regulatory authorities. These tests were developed primarily to assist
state insurance departments in executing their statutory mandate to oversee the
financial condition of insurance companies. Insurance companies submit data on
an annual basis to the NAIC, which in turn analyzes the data using ratios
covering twelve categories of financial data with defined "usual ranges" for
each category.
Falling outside the usual range of IRIS ratios is not considered a failing
result; rather, unusual values are viewed as part of the regulatory early
monitoring system. Furthermore, in some years, it may not be unusual for
financially sound companies to have several ratios with results outside the
usual ranges. An insurance company may fall out of the usual range for one or
more ratios because of specific transactions that are in themselves immaterial.
Generally, an insurance company will become subject to regulatory scrutiny if it
falls outside the usual ranges of four or more of the ratios. In normal years,
15% of the companies included in the IRIS system are expected by the NAIC to be
outside the usual range on four or more ratios.
59
<PAGE> 63
In each of the last three years certain of the Company's subsidiaries have
been outside of the usual range for certain IRIS ratios. In all such instances,
the regulators have been satisfied upon follow-up that there is no solvency
problem. It is possible that similar events could occur this year, and
management believes that the resolution would be the same. No regulatory action
has been taken by any state insurance department or the NAIC with respect to
IRIS ratios of any of the Company's insurance subsidiaries for the three years
ended December 31, 1996.
For 1996, Travelers Indemnity did not have any IRIS ratios outside the
usual range. However, both the two-year overall operating ratio and the two-year
reserve development to surplus ratios were outside the usual range for Aetna
Casualty and Standard Fire because of actions taken during 1996 and 1995 to
strengthen reserves for environmental and asbestos-related claims. In addition,
the change in writings ratio produced an unusual value for Standard Fire and the
estimated current reserve deficiency to surplus ratio was outside the usual
range for Aetna C&S of America, both as a result of management's decision in
1995 to combine its two intercompany pooling arrangements (one for Personal
Lines and one for Commercial Lines) into one pool. If these two ratios were
recalculated to have all items reflect the new agreement, the ratios would not
produce unusual values. Concurrent with the change in the intercompany pooling
arrangements, capital was reallocated among Aetna P&C insurers, which resulted
in an unusual value in the change in surplus ratio for Standard Fire.
Risk-Based Capital (RBC) Requirements
In order to enhance the regulation of insurer solvency, the NAIC has
adopted a formula and model law to implement RBC requirements for life insurance
companies and most property and casualty insurance companies, which is designed
to assess minimum capital requirements and to raise the level of protection that
statutory surplus provides for policyholder obligations. The RBC requirements
are to be used as early warning tools by the NAIC and states to identify
companies that merit further regulatory action. For these purposes, an insurer's
surplus is measured in relation to its specific asset and liability profiles. A
company's risk-based capital is calculated by applying factors to various asset,
premium and reserve items, where the factor is higher for those items with
greater underlying risk and lower for less risky items.
The RBC formula for property-casualty insurance companies measures four
major areas of risk facing property and casualty insurers: (i) underwriting,
which encompasses the risk of adverse loss developments and inadequate pricing;
(ii) declines in asset values arising from credit risk; (iii) declines in asset
values arising from investment risks; and (iv) off-balance sheet risk arising
from adverse experience from non-controlled assets, guarantees for affiliates or
other contingent liabilities and reserve and premium growth. Pursuant to the
law, insurers having less statutory surplus than that required by the RBC
calculation will be subject to varying degrees of regulatory action, depending
on the level of capital inadequacy.
60
<PAGE> 64
The RBC formula for life insurance companies calculates baseline life
risk-based capital as a mathematical combination of amounts for the following
four categories of risk: (i) asset risk (i.e., the risk of asset default); (ii)
insurance risk (i.e., the risk of adverse mortality and morbidity experience);
(iii) interest rate risk (i.e., the risk of loss due to changes in interest
rates); and (iv) business risk (i.e., normal business and management risk).
The RBC law provides for four levels of regulatory action. The extent of
regulatory intervention and action increases as the level of surplus to RBC
falls. The first level, the Company Action Level (as defined by the NAIC),
requires an insurer to submit a plan of corrective actions to the regulator if
surplus falls below 200% of the RBC amount. The Regulatory Action Level (as
defined by the NAIC) requires an insurer to submit a plan containing corrective
actions and permits the relevant Insurance Commissioner to perform an
examination or other analysis and issue a corrective order if surplus falls
below 150% of the RBC amount. The Authorized Control Level (as defined by the
NAIC) allows the relevant Insurance Commissioner to rehabilitate or liquidate an
insurer in addition to the aforementioned actions if surplus falls below 100% of
the RBC amount. The fourth action level is the Mandatory Control Level (as
defined by the NAIC) which requires the relevant Insurance Commissioner to
rehabilitate or liquidate the insurer if surplus falls below 70% of the RBC
amount. Based on the foregoing formula, at December 31, 1996, the RBC ratios of
the Company's insurance subsidiaries were in excess of levels that would require
company or regulatory action.
The formulas have not been designed to differentiate among adequately
capitalized companies which operate with higher levels of capital. Therefore, it
is inappropriate and ineffective to use the formulas to rate or to rank such
companies. At December 31, 1996, all of the Company's life and property-casualty
insurance companies had adjusted capital in excess of amounts requiring
regulatory action at any of the four levels.
Federal Regulation
Although the federal government does not directly regulate the business of
insurance, other than flood insurance, federal initiatives often have an impact
on the insurance industry. Legislation has been introduced in Congress during
the past several sessions that, if enacted, would result in substantially
greater federal regulation of the insurance business. Current and proposed
federal measures that may affect the property and casualty industry may include
possible changes to CERCLA and the tax laws governing property and casualty
insurance companies, proposed limits to product liability lawsuits and other
tort reform proposals. In addition, proposed legislation has been introduced in
Congress from time to time that would modify certain laws and regulations
affecting the financial services industry, including the provisions regarding
affiliations among insurance companies, investment banks and commercial banks.
61
<PAGE> 65
It is not possible to predict whether such proposed legislation will be
enacted, what form such legislation might take when enacted, or the potential
effects of such legislation on the Company and its competitors.
Certain variable life insurance and individual and group variable
annuities, as well as modified guaranteed annuities, and their related separate
accounts are subject to regulation by the Commission.
Investments
This section discusses the investment portfolios of the businesses
described in the Company's insurance services segments.
Insurance company investments must comply with applicable laws and
regulations which prescribe the kind, quality and concentration of investments.
In general, these laws and regulations permit investments, within specified
limits and subject to certain qualifications, in federal, state and municipal
obligations, corporate bonds, preferred and common equity securities, real
estate mortgages and real estate.
At December 31, 1996, the investment holdings of the companies included in
the insurance services segments were composed primarily of fixed maturities. At
December 31, 1996, approximately 96.1% in total dollar amount of the fixed
maturities portfolios of such companies had investment grade ratings. The
remaining investments are principally mortgage loans and real estate, discussed
below, policy loans and other investments. For additional information regarding
these investment portfolios, see Note 5 of Notes to Consolidated Financial
Statements and the discussion of Asset Quality in the Property & Casualty
Insurance Services Segment discussion in Item 7 of this Form 10-K, "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Consistent with the nature of related contract obligations, the invested
assets attributable to group insurance and individual life, accident and health
and financial services are primarily long-term fixed income investments such as
corporate debt securities, mortgage and asset-backed securities and mortgage
loans. A small portion of the invested assets related to these operations is in
preferred and common stocks and real estate equity investments. The
property-casualty fixed maturities portfolios (principally bonds) are shifted
from time to time to respond to the changing economic outlook, insurance
underwriting results and the resultant changes in the federal income tax
position of the Company and its subsidiaries.
Cash available for investment is principally derived from operating
activities and investment income. In addition, cash becomes available for
investment from prepayment, maturity and sale of investments. In recent years,
the underperforming mortgage loan and real estate portfolios have been
significantly reduced. See "-- Mortgage Loans and Real Estate Held for Sale."
Different investment policies have been developed for various lines of
62
<PAGE> 66
business based on the product requirements, the type and term of the liabilities
associated with these products, regulatory requirements and tax treatment of the
businesses in which each company is engaged.
Mortgage Loans and Real Estate Held for Sale
At December 31, 1996, the mortgage loan and real estate held for sale
portfolios of the businesses included in the Company's insurance services
segments consisted of approximately $3.8 billion and $695 million, respectively.
Mortgage loans and real estate held for sale at December 31, 1996 include $811
million and $136 million, respectively, from the Acquisition. At December 31,
1995 and 1994, the mortgage loan portfolio consisted of approximately $4.0
billion and $5.4 billion, respectively, and the real estate held for sale
portfolio consisted of approximately $321 million and $418 million,
respectively. The Company has continued a program of disposing of its real
estate investments and expediting the payoff of certain mortgage loans and
reinvesting the proceeds to obtain current market yields. See Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for additional information.
The Company's accelerated liquidation strategy for foreclosed real estate
and certain mortgage loans has mitigated the negative impact that these
underperforming portfolios have had on the Company's investment income and the
Company believes that continuation of this strategy will have similar mitigating
effects. The Company expects that approximately half of maturing commercial
mortgage loans in its portfolio will be refinanced, restructured or foreclosed.
Restructured loans are defined as loans the terms of which have been changed
from the original contract generally by lowering the pay rate of interest in the
early years after modification. Loans which have pay rates of interest after
modification that are equal to or above market rates are not included in the
underperforming mortgage loan inventory. At December 31, 1996, 1995 and 1994,
approximately $91 million, $252 million and $511 million, or 2%, 6% and 9%,
respectively, of the combined mortgage loan portfolio of the Company was
classified as underperforming. Underperforming mortgage loans include delinquent
loans, loans in the process of foreclosure and loans modified at interest rates
below market.
For information regarding the principal balance of mortgage loans at
December 31, 1996 by contractual maturity, see Note 5 of Notes to Consolidated
Financial Statements. Actual maturities will differ from contractual maturities
because borrowers may have the right to prepay loans with or without prepayment
premiums. Unscheduled payments and sales of mortgage loans were $1.0 billion in
1996, $1.0 billion in 1995 and $1.3 billion in 1994. The average remaining life
of these mortgages is six years.
Real estate management evaluates the portfolio on an ongoing basis,
assessing the probabilities of loss with respect to a comprehensive series of
projections, including a host of
63
<PAGE> 67
variables relating to the borrower, the property, the term of the loan, the
tenant composition, rental rates, other supply and demand factors, and overall
economic conditions.
The following table summarizes by property type the mortgage loan portfolio
and real estate held for sale included in the investment portfolios of the
Company as of December 31, 1996, 1995 and 1994. For information summarizing the
geographic distribution of the mortgage loan portfolio and real estate assets,
see Note 5 of Notes to Consolidated Financial Statements.
(in millions)
Property Type: Mortgage Loans Real Estate
- -------------- -------------- -----------
1996 1995 1994 1996 1995 1994
------ ------ ------ ------ ------ ------
Commercial:
Office $1,698 $1,551 $2,141 $ 190 $ 177 $ 224
Apartment 467 654 1,112 68 8 9
Hotel 244 594 642 299 47 79
Retail 518 449 623 60 42 46
Industrial 158 181 228 31 9 13
Other 41 45 108 34 26 33
------ ------ ------ ------ ------ ------
Total commercial 3,126 3,474 4,854 682 309 404
Agricultural 686 574 562 13 12 14
------ ------ ------ ------ ------ ------
Total $3,812 $4,048 $5,416 $ 695 $ 321 $ 418
====== ====== ====== ====== ====== ======
Derivatives
See the section entitled "End User Activity" in Note 19 of Notes to
Consolidated Financial Statements for a discussion of the policies and
transactions related to derivatives of the Company.
CORPORATE AND OTHER OPERATIONS
In addition to its four business segments, the Company's Corporate and
Other segment consists of unallocated expenses and earnings primarily related to
interest, corporate administration, and certain corporate investments. In 1995
and through the date of sale in 1996, this segment also includes the Company's
interest in RCM Capital Management, a California Limited Partnership ("RCM").
In June 1996, the Company sold 100% of its interest in RCM, which provides
investment management services, to Dresdner Bank AG. Assets under management by
RCM were $26.2 billion at December 31, 1995 and $22.5 billion at December 31,
1994.
64
<PAGE> 68
In October 1995, the Company completed the sale to United HealthCare
Corporation of its 48.25% interest in The MetraHealth Companies, Inc.
("MetraHealth"). MetraHealth was formed in January 1995 as a joint venture of
the group medical insurance businesses of the Company and Metropolitan Life
Insurance Company ("MetLife"). The Company received $831 million in cash from
the sale of its interest in MetraHealth. During 1996, the Company received a
contingency payment (based on MetraHealth's 1995 results) and recognized a gain
in 1996 of $31 million after tax ($48 million pre-tax).
In January 1995, the Company completed the sale of its group life and
related businesses to MetLife. The purchase price for the group life business
was $350 million. In connection with the sale, the Company agreed to cede to
MetLife 100% of its risks in the businesses sold on an indemnity reinsurance
basis, effective January 1, 1995. All of the businesses sold to MetLife or
contributed to MetraHealth were included in the Company's Managed Care and
Employee Benefits Operations in 1994. These operations have been accounted for
as a discontinued operation. In 1995 and 1996 the Company's discontinued
operations reflect the medical insurance business not yet transferred, the gains
from the sales of these businesses and, in 1995, its equity interest in the
earnings of MetraHealth. See Note 3 of Notes to Consolidated Financial
Statements.
OTHER INFORMATION
General Business Factors
In the judgment of the Company, no material part of the business of the
Company and its subsidiaries is dependent upon a single customer or group of
customers, the loss of any one of which would have a materially adverse effect
on the Company, and no one customer or group of affiliated customers accounts
for as much as 10% of the Company's consolidated revenues.
At December 31, 1996, the Company had approximately 56,200 full-time and
2,700 part-time employees.
Source of Funds
For a discussion of the Company's sources of funds and maturities of the
long-term debt of the Company's subsidiaries, see Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations
Liquidity and Capital Resources," and Note 10 of Notes to Consolidated Financial
Statements.
65
<PAGE> 69
Taxation
For a discussion of tax matters affecting the Company and its operations,
see Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and Notes 1 and 13 of Notes to Consolidated Financial
Statements.
Financial Information about Industry Segments
For financial information regarding industry segments of the Company, see
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations," and Note 4 of Notes to Consolidated Financial Statements.
Executive Officers of the Company
The current executive officers of the Company are indicated below. Periods
of offices held include offices with the Company's predecessor, CCC, and unless
stated otherwise all offices listed below are with the Company. Ages are given
as of March 5, 1997.
Officer
Name Age Positions Since
---- --- --------- -------
Sanford I. Weill 63 Chairman of the Board 1986
and Chief Executive
Officer
James Dimon 40 President and Chief 1986
Operating Officer of the
Company; Chairman and Chief
Executive Officer of SB
Holdings and SBI
Jeffrey B. Lane 54 Vice Chairman 1996
Robert I. Lipp 58 Vice Chairman of the Company; 1986
Chairman of the Board,
President and Chief
Executive Officer of TAP
Jon C. Madonna 53 Vice Chairman of the Company; 1997
Vice Chairman of TAP
Joseph J. Plumeri II 53 Vice Chairman of the Company; 1994
Chief Executive Officer
of PFS
Michael A. Carpenter 49 Executive Vice President 1995
of the Company; Chairman,
President and Chief
Executive Officer of TIC
and TLAC
Irwin Ettinger 58 Executive Vice President 1987
and Chief Accounting
Officer
Charles O. Prince, III 47 Executive Vice President, 1986
General Counsel and
Secretary
Steven D. Black 44 Vice Chairman and Chief 1996*
Operating Officer of
SB Holdings and SBI
66
<PAGE> 70
Officer
Name Age Positions Since
---- --- --------- -----
Charles J. Clarke 61 Chairman and Chief Executive 1995*
Officer-Commercial Lines
of TAP
Donald R. Cooper 56 Chief Actuary 1995
Peter M. Dawkins 58 Chairman, President and 1992*
Chief Executive Officer
of Travelers Group Diversified
Distribution Services, Inc.
Jay S. Fishman 44 Senior Vice President of the 1991
Company; Vice Chairman of
TAP and President and Chief
Operating Officer of TAP's
Commercial Lines
Marjorie Magner 47 President and Chief Operating 1996*
Officer of CCC
Heidi G. Miller 43 Senior Vice President and 1992
Chief Financial Officer
Marc P. Weill 40 Senior Vice President and 1991
Chief Investment Officer
Robert B. Willumstad 51 Chairman and Chief Executive 1993*
Officer of CCC
- ----------------
* Indicates date that such officer became a member of the Company's Planning
Group.
Sanford I. Weill has been a director of the Company since 1986. He has been
Chairman of the Board and Chief Executive Officer of the Company and its
predecessor, CCC, since 1986; he was also its President from 1986 until 1991. He
was President of American Express Company from 1983 to 1985; Chairman of the
Board and Chief Executive Officer of American Express Insurance Services, Inc.
from 1984 to 1985; Chairman of the Board and Chief Executive Officer, or a
principal executive officer, of Shearson Lehman Brothers Inc. from 1965 to 1984;
Chairman of the Board of Shearson Lehman Brothers Holdings Inc. from 1984 to
1985; and a founding partner of Shearson's predecessor partnership from 1960 to
1965. Mr. Weill has been a director of TAP since 1996. Mr. Weill's son, Marc P.
Weill, is a Senior Vice President and an executive officer of the Company. Mr.
Weill is Chairman of the Board of Trustees of Carnegie Hall, and a director of
the Baltimore Symphony Orchestra. Mr. Weill is a member of the Board of
Governors of New York Hospital and is Chairman of the Board of Overseers of
Cornell University Medical College. He is on the Board of Overseers of Memorial
Sloan-Kettering Cancer Center. He is a member of Cornell University's Johnson
Graduate School of Management Advisory Board and a Board of Trustees Fellow. Mr.
Weill is Chairman of the National Academy Foundation, whose member programs
include the Academy of Finance, the Academy of Travel and Tourism and the
Academy of Public Service.
67
<PAGE> 71
Mr. Dimon has been a director of the Company since September 1991. He is
President and Chief Operating Officer of the Company. He is also Chairman of the
Board, Chief Executive Officer and a member of the executive committee of SBI.
Mr. Dimon has been a director of TAP since 1996. From May 1988 to June 1995, he
was Chief Financial Officer of the Company. From May 1988 to September 1991, he
was Executive Vice President of the Company. Mr. Dimon was Chief Operating
Officer of SBI until January 1996 and was Senior Executive Vice President and
Chief Administrative Officer of SBI from 1990 to 1991. He is also Chief
Executive Officer and Chairman of the Board of SB Holdings. From March 1994 to
January 1996, he was Chief Operating Officer of SB Holdings. From 1986 to 1988,
Mr. Dimon was Senior Vice President and Chief Financial Officer of CCC, the
Company's predecessor. From 1982 to 1985, he was a Vice President of American
Express Company and Assistant to the President, Sanford I. Weill. Mr. Dimon is a
trustee of New York University Medical Center and a director of the Center on
Addiction and Substance Abuse and the National Association of Securities
Dealers, Inc.
Mr. Lane has been a Vice Chairman of the Company since January 1996. He has
served as a Director of SBI from January 1991 through March 1996 and as a
Director of SB Holdings from November 1993. Mr. Lane served as Vice Chairman of
SBI from January 1991 through January 1996 and as Vice Chairman of SB Holdings
from November 1993 through January 1996. He joined the Company in 1990. Prior to
joining the Company in 1990, Mr. Lane was President and Chief Operating Officer
of Shearson Lehman Brothers Inc.
Mr. Lipp has been a director of the Company since 1991 and is a Vice
Chairman of the Company. Mr. Lipp has been Chairman of the Board, Chief
Executive Officer and President of TAP since January 1996. Mr. Lipp has been
Chairman of the Board and Chief Executive Officer of The Travelers Insurance
Group Inc. since December 1993. From 1991 to 1993, he was Chairman and Chief
Executive Officer of CCC. From April 1986 through September 1991, he was an
Executive Vice President of the Company and its corporate predecessor. Prior to
joining the Company in 1986, he was a President and a director of Chemical New
York Corporation and Chemical Bank where he held senior executive positions for
more than five years prior thereto. Mr. Lipp is a director of The New York City
Ballet, Wadsworth Atheneum and the Massachusetts Museum of Contemporary Art and
Chairman of Dance-On Inc., a private foundation.
Mr. Madonna joined the Company in February 1997 as Vice Chairman, and also
serves as Vice Chairman of TAP. Prior to joining the Company, Mr. Madonna was
Chairman of KPMG International since October 1995. From 1990 to 1996, he was
Chairman and Chief Executive Officer of KPMG Peat Marwick LLP.
Mr. Plumeri has been a Vice Chairman of the Company since July 1994 and has
been Chairman and Chief Executive Officer of PFS since April 1996. He joined the
Company in August 1993, serving as President of SBI from that time through July
1994. Mr. Plumeri had worked for Shearson Lehman Brothers Inc. or its
predecessors for over 25 years, in various
68
<PAGE> 72
positions of increasing responsibility, until SBI acquired certain businesses
from Shearson Lehman Brothers Holdings Inc. ("SLB"). At that time, Mr. Plumeri
was a Managing Partner of SLB, and from 1990 until September 1992 he served as
President of SLB's Private Client Group.
Mr. Carpenter has been an Executive Vice President of the Company since
July 1995 and also serves as Chairman, Chief Executive Officer and President of
TIC and TLAC. From January 1989 to June 1994, Mr. Carpenter was Chairman of the
Board, President and Chief Executive Officer of Kidder, Peabody Group, Inc., an
investment banking and brokerage company that was a wholly owned subsidiary of
General Electric Company. Prior thereto, he served as Executive Vice President
of General Electric Capital Corporation and Vice President of General Electric
Company.
Mr. Ettinger has been an Executive Vice President of the Company since
January 1996. Prior to joining CCC as Senior Vice President in October 1987, he
was Partner in charge of the Tax Department of Arthur Young and Company's New
York offices.
Mr. Prince has been General Counsel of the Company or its predecessor since
1983, and served as a Senior Vice President from 1986 until January 1996, when
he became an Executive Vice President.
Mr. Black has been Vice Chairman of SB Holdings since November 1993 and
Vice Chairman of SBI since July 1993. He was elected Chief Operating Officer of
those companies in January 1996. He is also a member of the executive committee
and a director of each of SB Holdings and SBI. Mr. Black has served as the head
of Smith Barney's Capital Markets Division from 1991 to January 1996, and has
served in several positions at Smith Barney since 1974.
Mr. Clarke has been Chairman and Chief Executive Officer--Commercial Lines
of TAP since January 1996, and Chairman of the Company's Property-Casualty
Commercial Lines since 1990. Mr. Clarke has served in various positions at
Travelers P&C since 1958.
Mr. Cooper has been Chief Actuary of the Company since March 1995 and has
been Vice Chairman of Travelers Insurance Holdings Inc. since October 1990. He
also serves as Chairman of the Board of both AHL and Resource Deployment, Inc.,
subsidiaries of the Company.
Mr. Dawkins has been Chairman, President and Chief Executive Officer of
Travelers Group Diversified Distribution Services, Inc. since August 1996. In
addition, he has been a director of Travelers Group Exchange, Inc. since
September 1996 and became its Chief Executive Officer in January 1997. Mr.
Dawkins joined the Company in 1991 as Chairman and Chief Executive Officer of
Primerica Financial Services, Inc., and served in that capacity until August
1996.
69
<PAGE> 73
Mr. Fishman has been a Senior Vice President of the Company since October
1991. In January 1996, he became Vice Chairman and Chief Administrative Officer
of TAP and since October 1996 he has been President and Chief Operating Officer
of TAP's Commercial Lines. He has also served as Vice Chairman of TIGI since
September 1995 and as Chief Financial Officer of that company since December
1993. Mr. Fishman was Treasurer of the Company from October 1991 to December
1993. Prior thereto, he held various other positions with the Company and its
subsidiaries since 1989, when he joined the Company from Shearson Lehman
Brothers Inc., where he was Senior Vice President of Merchant Banking.
Ms. Magner has been President of CCC since June 1993 and became its Chief
Operating Officer in December 1995. Ms. Magner joined CCC in May 1987, and
served as Chief Administrative Officer from 1993 to 1996. From 1991 to 1993, she
was Executive Vice President, Marketing and Operations of CCC.
Ms. Miller has been Chief Financial Officer and Senior Vice President of
the Company since June 1995. She also serves as Chief Credit Officer of SBI, a
position she has held since September 1994. Ms. Miller joined the Company in
February 1992 as a Vice President. Prior thereto, she was a Managing Director in
the Emerging Markets Division of Chemical Bank, a position she held from 1987 to
1992.
Marc P. Weill has been a Senior Vice President and Chief Investment Officer
of the Company since January 1992. He also serves as a director, Chairman of the
Board and President of Travelers Asset Management International Corporation, a
registered investment advisor. Mr. Weill has held various other positions with
the Company and its subsidiaries since January 1991. He is the son of Sanford I.
Weill.
Mr. Willumstad has been Chairman and Chief Executive Officer of CCC since
June 1993 and has been with that company since 1987. From 1989 until assuming
his current position, he served as President of the Consumer Finance Services
unit of the Company. Mr. Willumstad is a member of the U.S. Region Board of
Directors of MasterCard International.
GLOSSARY OF INSURANCE TERMS
Accident year ................ The annual accounting period in which loss
events occurred, regardless of when the
losses are actually reported, booked or paid.
Adjusted unassigned surplus... Unassigned surplus as of the most recent
statutory annual report reduced by
twenty-five percent of that year's unrealized
appreciation in value or revaluation of
assets or unrealized profits on investments,
as defined in such report.
70
<PAGE> 74
Admitted insurer.............. A company licensed to transact insurance
business within a state.
Alternative market............ The segment of the insurance market which has
developed in response to volatility in cost
and availability of traditional commercial
insurance coverage and consists of various
risk financing mechanisms, including self
insurance, captive insurance companies, risk
retention groups and residual market
business.
Annuity....................... A contract that pays a periodic income
benefit for the life of a person (the
annuitant), the lives of two or more persons
or for a specified period of time.
Assigned risk pools........... Reinsurance pools which cover risks for those
unable to purchase insurance in the voluntary
market because the risk is too great or rate
inadequacy has reduced the supply of
insurance. The costs of the risks associated
with these pools are charged back to
insurance carriers in proportion to their
direct writings.
Assumed reinsurance........... Insurance liabilities acquired from a ceding
company.
Assumption reinsurance........ A transaction whereby the ceding company
transfers its entire obligation under the
policy to the reinsurer, who becomes directly
liable to the policyholder in all respects,
including collecting premiums and paying
benefits. See "Reinsurance."
Attachment point.............. The amount of losses above which excess of
loss reinsurance becomes operative.
Broker........................ One who negotiates contracts of insurance or
reinsurance on behalf of an insured party,
receiving a commission from the insurer or
reinsurer for placement and other services
rendered.
Capacity...................... The percentage of surplus, or the dollar
amount of exposure, that an insurer or
reinsurer is willing to place at risk.
Capacity may apply to a single risk, a
program, a line of business or an entire book
of business. Capacity may be constrained by
legal restrictions, corporate restrictions or
indirect restrictions.
Captive company............... An insurance company formed to insure the
risks of its parent entity or entities.
71
<PAGE> 75
Case reserves................. Loss reserves, established with respect to
specific, individual reported claims.
Casualty insurance............ Insurance which is primarily concerned with
the losses caused by injuries to third
persons (i.e., not the insured) and the legal
liability imposed on the insured resulting
therefrom. It includes, but is not limited
to, employers' liability, workers'
compensation, public liability, automobile
liability, personal liability and aviation
liability insurance. It excludes certain
types of losses that by law or custom are
considered as being exclusively within the
scope of other types of insurance, such as
fire or marine.
Catastrophe................... A severe loss, usually involving risks such
as fire, earthquake, windstorm, explosion and
other similar events.
Catastrophe loss.............. Loss and directly identified loss adjustment
expenses from catastrophes.
Catastrophe reinsurance....... A form of excess of loss property reinsurance
which, subject to a specified limit,
indemnifies the ceding company for the amount
of loss in excess of a specified retention
with respect to an accumulation of losses
resulting from a catastrophic event. The
actual reinsurance document is called a
"catastrophe cover."
Cede; ceding company.......... When an insurer reinsures its liability with
another insurer (a "cession"), it "cedes"
business and is referred to as the "ceding
company."
Ceded reinsurance............. Risks transferred to another company as
reinsurance. See "Reinsurance."
Claim......................... Request by an insured for indemnification by
an insurance company for loss incurred from
an insured peril.
Claim adjustment expense...... See "Loss adjustment expense."
Claims and claim adjustment
expense..................... See "Loss and loss adjustment expenses."
Claims and claim adjustment
expense reserves............ See "Loss reserves."
72
<PAGE> 76
Clash cover................... An excess of loss agreement with a retention
higher than the limits on any one reinsured
policy. The agreement is thus only exposed to
loss when two or more policies (perhaps from
different lines of business) are involved in
a common occurrence in an amount greater than
the clash cover retention. Also known as
contingency cover.
Combined ratio................ The sum of the loss and LAE ratio, the
underwriting expense ratio and, where
applicable, the ratio of dividends to
policyholders to net premiums earned. A
combined ratio under 100% generally indicates
an underwriting profit. A combined ratio over
100% generally indicates an underwriting
loss.
Commercial lines.............. The various kinds of insurance which are
written for businesses.
Commutation agreement......... An agreement between a reinsurer and a ceding
company whereby the reinsurer pays an agreed
upon amount in exchange for a complete
discharge of all obligations, including
future obligations, between the parties for
reinsurance losses incurred.
Contractholder funds.......... Receipts from the issuance of universal life,
pension investment and certain individual
annuity contracts. Such receipts are
considered deposits on investment contracts
that do not have substantial mortality or
morbidity risks.
Deductible.................... The amount of loss that an insured retains.
Deferred acquisition costs.... Commissions and premium taxes and, for
certain life insurance lines, other
origination costs, which vary with and are
primarily related to the production of new
business, are deferred and amortized to
achieve a matching of revenues and expenses
when reported in financial statements
prepared in accordance with GAAP.
Defined contribution plans.... Type of pension plan in which the
contribution rate is certain but the
retirement benefit is variable.
Deposits and other
considerations.............. Consist of cash deposits and charges for
mortality risk and expenses associated with
universal life insurance, annuities and group
pensions.
73
<PAGE> 77
Direct written premiums....... The amounts charged by a primary insurer to
insureds in exchange for coverages provided
in accordance with the terms of an insurance
contract.
Earned premiums or premiums
earned...................... That portion of property-liability premiums
written that applies to the expired portion
of the policy term. Earned premiums are
recognized as revenues under both SAP and
GAAP.
Excess liability.............. Additional casualty coverage above the first
layer.
Excess loss coverage.......... Coverage which indemnifies the person for
that portion of the loss (arising out of a
loss occurrence) which is in excess of the
deductible.
Excess of loss reinsurance.... Reinsurance that indemnifies the reinsured
against all or a specified portion of losses
under reinsured policies in excess of a
specified dollar amount or "retention."
Expense ratio................. See "Underwriting expense ratio."
Extra contractual obligations
losses...................... Losses incurred by an insurer, beyond those
that would have been incurred as specified in
the insurance agreement with an insured, due
to monetary awards required by a court of law
against the insurer for its negligence to or
bad faith in dealing with its insured.
Facultative reinsurance....... The reinsurance of all or a portion of the
insurance provided by a single policy. Each
policy reinsured is separately negotiated.
Fidelity and surety programs.. Insurance which guarantees performance of an
obligation or indemnifies for loss due to
embezzlement or wrongful abstraction of
money, securities or other property.
Fiduciary accounts............ Accounts held on behalf of others.
General account............... All an insurer's assets other than those
allocated to separate accounts.
Guaranteed cost insurance..... Premium charged on a prospective basis which
may be fixed or adjustable on a specified
rating basis but never on the basis of loss
experience in the period of coverage.
74
<PAGE> 78
Guaranteed cost products...... An insurance policy where the premiums
charged will not be adjusted for actual loss
experience during the covered period.
Guaranteed investment
contracts (GICs)............ Group contracts sold to pension plans, profit
sharing plans and funding agreements that
guarantee a stated interest rate for a
specified period of time.
Guaranty fund................. State-regulated mechanism which is financed
by assessing insurers doing business in those
states. Should insolvencies occur, these
funds are available to meet some or all of
the insolvent insurer's obligations to
policyholders.
Incurred but not reported
("IBNR") reserves........... Reserves for estimated losses and LAE which
have been incurred but not yet reported to
the insurer.
Indemnity reinsurance......... A transaction whereby the reinsurer agrees to
indemnify the ceding company against all or
part of the loss that the latter may sustain
under the policies it issued that are being
reinsured. The ceding company remains
primarily liable as the direct insurer on all
risks ceded. See "Reinsurance."
Inland marine................. A broad type of insurance generally covering
articles that may be transported from one
place to another, as well as bridges, tunnels
and other instrumentalities of
transportation. It includes goods in transit
(generally other than transoceanic) and may
include policies for movable objects such as
personal effects, personal property, jewelry,
furs, fine art and others.
Insurance..................... Mechanism for contractually shifting burdens
of a number of risks by pooling them.
Involuntary business
(alternative market)........ Risks that are not insurable in the voluntary
market due to either the level of risk or
pricing. Alternative markets are largest for
lines in which state governments or other
agencies mandate coverage such as workers'
compensation. Generally states provide
residual market plans that are designed to
allocate the underwriting experience for
these coverages in proportion to a given
carrier's market share.
75
<PAGE> 79
IRIS ratios................... Financial ratios calculated by the NAIC to
assist state insurance departments in
monitoring the financial condition of
insurance companies.
Large deductible
policy...................... An insurance policy where the customer
assumes at least $25,000 or more of each
loss.
Life contingencies............ Contingencies affecting the duration of life
of an individual or a group of individuals.
Long-term care................ Coverage for extended stays in a nursing home
or home health services.
Loss.......................... An occurrence that is the basis for
submission and/or payment of a claim. Losses
may be covered, limited or excluded from
coverage, depending on the terms of the
policy.
Loss adjustment expense
("LAE")..................... The expenses of settling claims, including
legal and other fees and the portion of
general expenses allocated to claim
settlement costs.
Loss and LAE ratio............ For SAP it is the ratio of incurred losses
and loss adjustment expenses to net premiums
earned. For GAAP it is the ratio of incurred
losses and loss adjustment expenses to net
premiums earned plus fee income.
Loss ratios................... See "Combined ratio."
Loss reserves................. Liabilities established by insurers and
reinsurers to reflect the estimated cost of
claims incurred that the insurer or reinsurer
will ultimately be required to pay in respect
of insurance or reinsurance it has written.
Reserves are established for losses and for
LAE, and consist of case reserves and IBNR
reserves.
Losses and loss adjustment
expenses.................... The sum of losses incurred and loss
adjustment expenses.
Losses incurred............... The total losses sustained by an insurance
company under a policy or policies, whether
paid or unpaid. Incurred losses includes a
provision for IBNR.
76
<PAGE> 80
Morbidity..................... The rate at which people become diseased,
mentally or physically, or physically
impaired.
Mortality..................... The rate at which people die.
Multi-peril policies.......... Refers to policies which cover both property
and third party liability exposures.
National Association of
Insurance Commissioners
("NAIC").................... An organization of the insurance
commissioners or directors of all 50 states
and the District of Columbia organized to
promote consistency of regulatory practice
and statutory accounting standards throughout
the United States.
Net written premiums.......... Direct written premiums plus assumed
reinsurance less premiums ceded to
reinsurers.
Non-admitted coverage......... Insurance coverage written in a given state
by an insurer not licensed in that state.
Novation...................... A transaction in which the original direct
insurer's obligations are completely
extinguished, resulting in no further
exposure to loss arising on the business
novated.
Personal lines................ Types of insurance written for individuals or
families, rather than for businesses.
Policy loan................... A loan made by an insurance company to a
policyholder on the security of the cash
value of the policy. Policy loans offset
benefits payable to policyholders.
Pool.......................... An organization of insurers or reinsurers
through which particular types of risks are
underwritten with premiums, losses and
expenses being shared in agreed percentages.
Premium equivalents........... Premium equivalents represent estimates of
premiums that customers would have been
charged under a fully insured arrangement,
based on expected losses associated with
non-risk-bearing components of each account,
as determined in the pricing process. Premium
equivalents are indicative of the volume of
business handled by an insurer in servicing
relationships. Premium equivalents do not
represent actual premium revenues.
77
<PAGE> 81
Premiums...................... The amount charged during the year on
policies and contracts issued, renewed or
reinsured by an insurance company.
Producer...................... Contractual entity which directs insureds to
the insurer for coverage. See "Broker."
Property insurance............ Insurance that provides coverage to a person
with an insurable interest in tangible
property for that person's property loss,
damage or loss of use.
Quota share reinsurance....... Reinsurance wherein the insurer cedes an
agreed fixed percentage of liabilities,
premiums and losses for each policy covered
on a pro rata basis.
Rate of renewal/retention
ratio....................... Current period renewal accounts or policies
as a percentage of expired accounts or
policies.
Rates......................... Amounts charged per unit of insurance.
Reinsurance................... The practice whereby one insurer, called the
reinsurer, in consideration of a premium paid
to such insurer, agrees to indemnify another
insurer, called the ceding company, for part
or all of the liability assumed by the ceding
company under one or more policies or
contracts of insurance which it has issued.
Reinsurance agreement......... A contract specifying the terms of a
reinsurance transaction.
Reinsurance pools and
associations................ Mechanisms established to aggregate
insurance, and then distribute results to
participants in the mechanism. The pool or
association performs rating, loss adjustment
and engineering services for certain
exposures. In some cases, they are
established to absorb business that will not
be written voluntarily by insurers.
Residual market (involuntary
business)................... Insurance market which provides coverage for
risks unable to purchase insurance in the
voluntary market either because the risk is
too great or rate inadequacy has reduced the
supply of insurance. Residual markets are
frequently created by state legislation
either because of lack of available coverage
such as property coverage in a windstorm
prone area or protection of the accident
victim as in the case of workers'
78
<PAGE> 82
compensation. The costs of the residual
market are usually charged back to the direct
insurance carriers in proportion to the
carriers' voluntary market shares for the
type of coverage involved.
Retention..................... The amount of exposure an insurance company
retains on any one risk or group of risks.
Retrospective premiums........ Premiums related to retrospectively rated
policies.
Retrospective rating.......... A plan or method which permits adjustment of
the final premium or commission on the basis
of actual loss experience, subject to certain
minimum and maximum limits.
Risk-based capital ("RBC").... A measure adopted by the NAIC for assessing
the minimum statutory capital and surplus
requirements of insurers.
Risk retention................ The amount or portion of a risk an insurer
retains for its own account after ceded
reinsurance. Losses above the stated
retention level are collectible from the
reinsurer. The retention level may be stated
as a percentage or dollar amount.
Salvage....................... The amount of money an insurer recovers
through the sale of property transferred to
the insurer as a result of a loss payment.
Second injury fund............ The employer of an injured, impaired worker
is responsible only for the workers'
compensation benefit for the most recent
injury; the second injury fund would cover
the cost of any additional benefits for
aggravation of a prior condition. The cost is
shared by the insurance industry, funded
through assessments to insurance companies
based on either premiums or losses.
Self-insured retentions....... That portion of the risk retained by a person
for its own account.
Separate accounts............. Funds for which investment income and
investment gains and losses accrue directly
to, and investment risk is borne by, the
contractholders. The assets of these separate
accounts are legally segregated and not
subject to claims that arise out of any other
business of the insurance company.
79
<PAGE> 83
Servicing carrier............. An insurance company that provides, for a
fee, various services including policy
issuance, claims adjusting and customer
service for insureds in a reinsurance pool.
Standard policy forms......... Self-contained pre-printed policy language
used when a large number of insureds face
similar loss exposures.
Statutory accounting practices
("SAP")..................... The rules and procedures prescribed or
permitted by United States state insurance
regulatory authorities for recording
transactions and preparing financial
statements. Statutory accounting practices
generally reflect a modified going concern
basis of accounting.
Statutory surplus............. As determined under SAP, the amount remaining
after all liabilities, including loss
reserves, are subtracted from all admitted
assets. Admitted assets are assets of an
insurer prescribed or permitted by a state to
be recognized on the statutory balance sheet.
Statutory surplus is also referred to as
"surplus" or "surplus as regards
policyholders" for statutory accounting
purposes.
Structured settlements........ Periodic payments to an injured person or
survivor for a determined number of years or
for life, typically in settlement of a claim
under a liability policy, usually funded
through the purchase of an annuity.
Subrogation................... A principle of law incorporated in insurance
policies, which enables an insurance company,
after paying a loss to its insured, to
recover the amount of the loss from another
who is legally liable for it.
Surrender value............... The amount of money, usually the legal
reserve under the policy, less sometimes a
surrender charge, which an insurance company
will pay to a policyholder who cancels a
policy. This value may be used as collateral
for a loan.
Third party liability......... A liability owed to a claimant (or "third
party") who is not one of the two parties to
the insurance contract. Insured liability
claims are referred to as third party claims.
Treaty reinsurance............ The reinsurance of a specified type or
category of risks defined in a reinsurance
agreement (a "treaty") between a primary
insurer or other reinsured and a reinsurer.
Typically, in treaty reinsurance, the primary
insurer or reinsured is
80
<PAGE> 84
obligated to offer and the reinsurer is
obligated to accept a specified portion of
all such type or category of risks originally
written by the primary insurer or reinsured.
Umbrella coverage............. A form of insurance protection against losses
in excess of amounts covered by other
liability insurance policies or amounts not
covered by the usual liability policies.
Unassigned funds (surplus).... The undistributed and unappropriated amount
of statutory surplus.
Underwriter................... An employee of an insurance company who
examines, accepts or rejects risks and
classifies accepted risks in order to charge
an appropriate premium for each accepted
risk. The underwriter is expected to select
business that will produce an average risk of
loss no greater than that anticipated for the
class of business.
Underwriting.................. The insurer's or reinsurer's process of
reviewing applications for insurance
coverage, and the decision whether to accept
all or part of the coverage and determination
of the applicable premiums; also refers to
the acceptance of such coverage.
Underwriting expense ratio.... For SAP it is the ratio of underwriting
expenses incurred to net premiums written.
For GAAP it is the ratio of underwriting
expenses incurred to net premiums written
plus fee income.
Underwriting profit or
underwriting loss........... The pre-tax profit or loss experienced by a
property and casualty insurance company after
deducting loss and loss adjustment expenses
and operating expenses from net earned
premiums. This profit or loss calculation
includes reinsurance assumed and ceded but
excludes investment income.
Unearned premium.............. The portion of premiums written that is
allocable to the unexpired portion of the
policy term.
Voluntary market.............. The market in which a person seeking
insurance obtains coverage without the
assistance of residual market mechanisms.
Wholesale broker.............. An independent or exclusive agent that
represents both admitted and non admitted
insurers in market areas which include
standard, non-standard, specialty and excess
and
81
<PAGE> 85
surplus lines of insurance. The wholesaler
does not deal directly with the insurance
consumer. The wholesaler deals with the
retail agent or broker.
Workers' compensation......... A system (established under state laws) under
which employers provide insurance for benefit
payments to their employees for work-related
injuries, deaths and diseases, regardless of
fault.
PART IV
-------
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Documents filed as a part of the report:
(1) Financial Statements. See Index to Consolidated Financial
Statements and Schedules on page F-1 hereof.
(2) Financial Statement Schedules. See Index to Consolidated
Financial Statements and Schedules on page F-1 hereof.
(3) Exhibits:
See Exhibit Index.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the fourth quarter of 1996.
82
<PAGE> 86
EXHIBIT INDEX
-------------
Exhibit Filing
Number Description of Exhibit Method
- ------ ---------------------- ------
3.01 Restated Certificate of Incorporation of
Travelers Group Inc. (formerly The Travelers
Inc.) (the "Company"), Certificate of Designation
of Cumulative Adjustable Rate Preferred Stock,
Series Y, and Certificate of Amendment to the
Restated Certificate of Incorporation,
incorporated by reference to Exhibit 3.01 to
Amendment No. 1 to the Company's Registration
Statement on Form S-4 (No. 333-00737).
3.02 By-Laws of the Company as amended through January
24, 1996, incorporated by reference to Exhibit
3.02 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1995 (File
No. 1-9924) (the "Company's 1995 10-K").
10.01* Employment Protection Agreement, dated as of
December 31, 1987, between the Company (as
successor to Commercial Credit Company ("CCC"))
and Sanford I. Weill, incorporated by reference
to Exhibit 10.03 to CCC's Annual Report on Form
10-K for the fiscal year ended December 31, 1987
(File No. 1-6594).
10.02.1* Travelers Group Stock Option Plan (as amended and
restated as of April 24, 1996).
10.02.2* Amendment No. 14 to the Travelers Group Stock
Option Plan, incorporated by reference to Exhibit 10.01 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended September 30, 1996 (File No. 1-9924) (the "Company's
September
30, 1996 10-Q").
10.03* Travelers Group 1996 Stock Incentive Plan (as
amended through November 22, 1996).
10.04* Retirement Benefit Equalization Plan of the
Company (as amended and restated as of January 1,
1994).
10.05* Letter Agreement between Joseph A. Califano, Jr.
and the Company, dated December 14, 1988,
incorporated by reference to Exhibit 10.21.1 to
the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1988 (File No.
1-9924).
83
<PAGE> 87
EXHIBIT INDEX
-------------
Exhibit Filing
Number Description of Exhibit Method
- ------ ---------------------- ------
10.06* Travelers Group Inc. Amended and Restated
Compensation Plan for Non-Employee Directors,
incorporated by reference to Exhibit 10.02 to the
Company's September 30, 1996 10-Q.
10.07.1* Supplemental Retirement Plan of the Company, incorporated by
reference to Exhibit 10.23 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1990 (File No.
1-9924).
10.07.2* Amendment to the Company's Supplemental Retirement Plan,
incorporated by reference to Exhibit 10.06.2 to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1993 (File No. 1-9924) (the "Company's 1993
10-K").
10.08* The Travelers Inc. Executive Performance
Compensation Plan, effective April 27, 1994,
incorporated by reference to Exhibit 10.07 to the
Company's 1995 10-K.
10.09* Travelers Group Capital Accumulation Plan (as
amended through September 25, 1996), incorporated
by reference to Exhibit 10.03 to the Company's
September 30, 1996 10-Q.
10.10* Agreement dated December 21, 1993 between the
Company and Edward H. Budd, incorporated by
reference to Exhibit 10.22 to the Company's 1993
10-K.
10.11* The Travelers Inc. Deferred Compensation and
Partnership Participation Plan, incorporated by
reference to Exhibit 10.31 to the Company's
Annual Report on Form 10-K/A-1 for the fiscal
year ended December 31, 1994 (File No. 1-9924).
10.12.1 Stock Purchase Agreement dated as of November 28, 1995, between
The Travelers Insurance Group Inc. and Aetna Life and Casualty
Company, incorporated by reference to Exhibit 10.1 to the Annual
Report on Form 10-K of Aetna Life and Casualty Company for the
fiscal year ended December 31, 1995 (File No. 1-5704).
84
<PAGE> 88
EXHIBIT INDEX
-------------
Exhibit Filing
Number Description of Exhibit Method
- ------ ---------------------- ------
10.12.2 Assignment of Stock Purchase Agreement, dated as
of March 22, 1996, between Travelers Property
Casualty Corp. (formerly Travelers/Aetna Property
Casualty Corp.) ("TAP") and The Travelers
Insurance Group Inc., incorporated by reference
to Exhibit 2.2 to Amendment No. 5 of the
Registration Statement on Form S-1 of TAP (No.
333-2254).
10.12.3 Amendment to Stock Purchase Agreement, dated as of April 2,
1996, between TAP and Aetna Casualty and Surety Company,
incorporated by reference to Exhibit 10.01 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended March
31, 1996 (File No. 1-9924) (the "Company's March 31, 1996
10-Q").
10.13* The Travelers Corporation 1984 Management
Incentive Plan, as amended effective January 1,
1991, incorporated by reference to Exhibit 10(c)
to the Annual Report on Form 10-K of The
Travelers Corporation ("old Travelers") for the
fiscal year ended December 31, 1990 (File No.
1-5799).
10.14* The Travelers Corporation Supplemental Benefit
Plan, effective December 20, 1992, incorporated
by reference to Exhibit 10(d) to the Annual
Report on Form 10-K of old Travelers for the
fiscal year ended December 31, 1992 (File No.
1-5799).
10.15* The Travelers Corporation TESIP Restoration and
Non-Qualified Savings Plan, effective January 1,
1991, incorporated by reference to Exhibit 10(e)
to the Annual Report on Form 10-K of old
Travelers for the fiscal year ended December 31,
1991 (File No. 1-5799).
10.16* The Travelers Corporation Directors' Deferred
Compensation Plan, as amended November 7, 1986,
incorporated by reference to Exhibit 10(d) to the
Annual Report on Form 10-K of old Travelers for
the fiscal year ended December 31, 1986 (File No.
1-5799).
10.17* Employment Agreement dated as of December 30,
1994, between SBI and Joseph J. Plumeri II,
incorporated by reference to Exhibit 10.30 to the
Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994 (File No.
1-9924).
85
<PAGE> 89
EXHIBIT INDEX
-------------
Exhibit Filing
Number Description of Exhibit Method
- ------ ---------------------- ------
10.18* Letter Agreement, dated as of January 13, 1997,
between the Company and Jon C. Madonna.
10.19* Travelers Property Casualty Corp. Capital
Accumulation Plan (as amended through September
1, 1996), incorporated by reference to Exhibit
10.01 to the Quarterly Report on Form 10-Q of
Travelers Property Casualty Corp. (formerly
Travelers/Aetna Property Casualty Corp.) for the
fiscal quarter ended September 30, 1996 (File No.
1-14328).
11.01 Computation of Earnings Per Share.
12.01 Computation of Ratio of Earnings to Fixed
Charges.
13.01*** Pages 32 through 78 of the 1996 Annual Electronic
Report to Stockholders of the Company
(pagination of exhibit does not correspond
to pagination in the 1996 Annual Report to
Stockholders).
21.01 Subsidiaries of the Company.
23.01*** Consent of KPMG Peat Marwick LLP, Independent Electronic
Certified Public Accountants.
23.02** Accountant's consent to incorporation by
reference of report filed with Exhibit 99.07.
24.01 Powers of Attorney.
27.01 Financial Data Schedule.
99.01 The fourth paragraph on page 26 of the Company's
September 30, 1993 10-Q, the first paragraph
under the heading "Smith Barney" on page 65 of
the Company's 1995 10-K and the first paragraph
on page 34 of the Company's September 30, 1996
10-Q.
99.02 The third paragraph on page 16 of the Quarterly
Report on Form 10-Q of Smith Barney Holdings Inc.
for the fiscal quarter ended September 30, 1994
and the last full paragraph on page 65 of the
Company's 1995 10-K.
99.03 The first paragraph on page 35 of the Company's
Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 1996 (the "Company's June
30, 1996 10-Q").
99.04 The paragraph that begins on page 2 and ends on
page 3 of the Company's Current Report on Form
8-K dated March 1, 1994.
86
<PAGE> 90
EXHIBIT INDEX
-------------
Exhibit Filing
Number Description of Exhibit Method
- ------ ---------------------- ------
99.05 The paragraph that begins on page 90 and ends on
page 91 of the Prospectus dated April 22, 1996 of
TAP, the second paragraph on page 35 of the
Company's June 30, 1996 10-Q and the second
paragraph on page 34 of the Company's September
30, 1996 10-Q.
99.06 The second paragraph on page 30 of the Company's
Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 1995, the fourth
paragraph on page 25 of the Company's March 31,
1996 10-Q and the third paragraph on page 34 of
the Company's September 30, 1996 10-Q.
99.07** 1996 Financial Statements of Travelers Group
401(k) Savings Plan.
The total amount of securities authorized pursuant to any instrument defining
rights of holders of long-term debt of the Company does not exceed 10% of the
total assets of the Company and its consolidated subsidiaries. The Company will
furnish copies of any such instrument to the Commission upon request.
The financial statements required by Form 11-K for 1996 for the Travelers Group
401(k) Savings Plan were filed as an exhibit to Form 10-K/A-1 pursuant to Rule
15d-21 of the Securities Exchange Act of 1934, as amended.
Copies of any of the exhibits referred to above will be furnished at a cost of
$.25 per page (although no charge will be made for the 1996 Annual Report on
Form 10-K) to security holders who make written request therefor to Corporate
Communications and Investor Relations Department, Travelers Group Inc., 388
Greenwich Street, New York, New York 10013.
- --------
* Denotes a management contract or compensatory plan or arrangement required
to be filed as an exhibit pursuant to Item 14(c) of Form 10-K.
** Filed with Form 10-K/A-1.
*** Filed with Form 10-K/A-2.
Except as otherwise indicated, all other exhibits were filed with the initial
filing of the Form 10-K.
87
<PAGE> 91
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 24th day of
October, 1997.
TRAVELERS GROUP INC.
(Registrant)
By: /s/ Irwin Ettinger
-------------------------------
Irwin Ettinger
Executive Vice President
88
<PAGE> 92
EXHIBIT INDEX
-------------
Exhibit Filing
Number Description of Exhibit Method
- ------ ---------------------- ------
3.01 Restated Certificate of Incorporation of
Travelers Group Inc. (formerly The Travelers
Inc.) (the "Company"), Certificate of Designation
of Cumulative Adjustable Rate Preferred Stock,
Series Y, and Certificate of Amendment to the
Restated Certificate of Incorporation,
incorporated by reference to Exhibit 3.01 to
Amendment No. 1 to the Company's Registration
Statement on Form S-4 (No. 333-00737).
3.02 By-Laws of the Company as amended through January
24, 1996, incorporated by reference to Exhibit
3.02 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1995 (File
No. 1-9924) (the "Company's 1995 10-K").
10.01* Employment Protection Agreement, dated as of
December 31, 1987, between the Company (as
successor to Commercial Credit Company ("CCC"))
and Sanford I. Weill, incorporated by reference
to Exhibit 10.03 to CCC's Annual Report on Form
10-K for the fiscal year ended December 31, 1987
(File No. 1-6594).
10.02.1* Travelers Group Stock Option Plan (as amended and
restated as of April 24, 1996).
10.02.2* Amendment No. 14 to the Travelers Group Stock
Option Plan, incorporated by reference to Exhibit 10.01 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended September 30, 1996 (File No. 1-9924) (the "Company's
September
30, 1996 10-Q").
10.03* Travelers Group 1996 Stock Incentive Plan (as
amended through November 22, 1996).
10.04* Retirement Benefit Equalization Plan of the
Company (as amended and restated as of January 1,
1994).
10.05* Letter Agreement between Joseph A. Califano, Jr.
and the Company, dated December 14, 1988,
incorporated by reference to Exhibit 10.21.1 to
the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1988 (File No.
1-9924).
<PAGE> 93
EXHIBIT INDEX
-------------
Exhibit Filing
Number Description of Exhibit Method
- ------ ---------------------- ------
10.06* Travelers Group Inc. Amended and Restated
Compensation Plan for Non-Employee Directors,
incorporated by reference to Exhibit 10.02 to the
Company's September 30, 1996 10-Q.
10.07.1* Supplemental Retirement Plan of the Company, incorporated by
reference to Exhibit 10.23 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1990 (File No.
1-9924).
10.07.2* Amendment to the Company's Supplemental Retirement Plan,
incorporated by reference to Exhibit 10.06.2 to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1993 (File No. 1-9924) (the "Company's 1993
10-K").
10.08* The Travelers Inc. Executive Performance
Compensation Plan, effective April 27, 1994,
incorporated by reference to Exhibit 10.07 to the
Company's 1995 10-K.
10.09* Travelers Group Capital Accumulation Plan (as
amended through September 25, 1996), incorporated
by reference to Exhibit 10.03 to the Company's
September 30, 1996 10-Q.
10.10* Agreement dated December 21, 1993 between the
Company and Edward H. Budd, incorporated by
reference to Exhibit 10.22 to the Company's 1993
10-K.
10.11* The Travelers Inc. Deferred Compensation and
Partnership Participation Plan, incorporated by
reference to Exhibit 10.31 to the Company's
Annual Report on Form 10-K/A-1 for the fiscal
year ended December 31, 1994 (File No. 1-9924).
10.12.1 Stock Purchase Agreement dated as of November 28, 1995, between
The Travelers Insurance Group Inc. and Aetna Life and Casualty
Company, incorporated by reference to Exhibit 10.1 to the Annual
Report on Form 10-K of Aetna Life and Casualty Company for the
fiscal year ended December 31, 1995 (File No. 1-5704).
<PAGE> 94
EXHIBIT INDEX
-------------
Exhibit Filing
Number Description of Exhibit Method
- ------ ---------------------- ------
10.12.2 Assignment of Stock Purchase Agreement, dated as
of March 22, 1996, between Travelers Property
Casualty Corp. (formerly Travelers/Aetna Property
Casualty Corp.) ("TAP") and The Travelers
Insurance Group Inc., incorporated by reference
to Exhibit 2.2 to Amendment No. 5 of the
Registration Statement on Form S-1 of TAP (No.
333-2254).
10.12.3 Amendment to Stock Purchase Agreement, dated as of April 2,
1996, between TAP and Aetna Casualty and Surety Company,
incorporated by reference to Exhibit 10.01 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended March
31, 1996 (File No. 1-9924) (the "Company's March 31, 1996
10-Q").
10.13* The Travelers Corporation 1984 Management
Incentive Plan, as amended effective January 1,
1991, incorporated by reference to Exhibit 10(c)
to the Annual Report on Form 10-K of The
Travelers Corporation ("old Travelers") for the
fiscal year ended December 31, 1990 (File No.
1-5799).
10.14* The Travelers Corporation Supplemental Benefit
Plan, effective December 20, 1992, incorporated
by reference to Exhibit 10(d) to the Annual
Report on Form 10-K of old Travelers for the
fiscal year ended December 31, 1992 (File No.
1-5799).
10.15* The Travelers Corporation TESIP Restoration and
Non-Qualified Savings Plan, effective January 1,
1991, incorporated by reference to Exhibit 10(e)
to the Annual Report on Form 10-K of old
Travelers for the fiscal year ended December 31,
1991 (File No. 1-5799).
10.16* The Travelers Corporation Directors' Deferred
Compensation Plan, as amended November 7, 1986,
incorporated by reference to Exhibit 10(d) to the
Annual Report on Form 10-K of old Travelers for
the fiscal year ended December 31, 1986 (File No.
1-5799).
10.17* Employment Agreement dated as of December 30,
1994, between SBI and Joseph J. Plumeri II,
incorporated by reference to Exhibit 10.30 to the
Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994 (File No.
<PAGE> 95
EXHIBIT INDEX
-------------
Exhibit Filing
Number Description of Exhibit Method
- ------ ---------------------- ------
10.18* Letter Agreement, dated as of January 13, 1997,
between the Company and Jon C. Madonna.
10.19* Travelers Property Casualty Corp. Capital
Accumulation Plan (as amended through September
1, 1996), incorporated by reference to Exhibit
10.01 to the Quarterly Report on Form 10-Q of
Travelers Property Casualty Corp. (formerly
Travelers/Aetna Property Casualty Corp.) for the
fiscal quarter ended September 30, 1996 (File No.
1-14328).
11.01 Computation of Earnings Per Share.
12.01 Computation of Ratio of Earnings to Fixed
Charges.
13.01*** Pages 32 through 78 of the 1996 Annual Electronic
Report to Stockholders of the Company
(pagination of exhibit does not correspond
to pagination in the 1996 Annual Report to
Stockholders).
21.01 Subsidiaries of the Company.
23.01*** Consent of KPMG Peat Marwick LLP, Independent Electronic
Certified Public Accountants.
23.02** Accountant's consent to incorporation by
reference of report filed with Exhibit 99.07.
24.01 Powers of Attorney.
27.01 Financial Data Schedule.
99.01 The fourth paragraph on page 26 of the Company's
September 30, 1993 10-Q, the first paragraph
under the heading "Smith Barney" on page 65 of
the Company's 1995 10-K and the first paragraph
on page 34 of the Company's September 30, 1996
10-Q.
99.02 The third paragraph on page 16 of the Quarterly
Report on Form 10-Q of Smith Barney Holdings Inc.
for the fiscal quarter ended September 30, 1994
and the last full paragraph on page 65 of the
Company's 1995 10-K.
99.03 The first paragraph on page 35 of the Company's
Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 1996 (the "Company's June
30, 1996 10-Q").
99.04 The paragraph that begins on page 2 and ends on
page 3 of the Company's Current Report on Form
8-K dated March 1, 1994.
<PAGE> 96
EXHIBIT INDEX
-------------
Exhibit Filing
Number Description of Exhibit Method
- ------ ---------------------- ------
99.05 The paragraph that begins on page 90 and ends on
page 91 of the Prospectus dated April 22, 1996 of
TAP, the second paragraph on page 35 of the
Company's June 30, 1996 10-Q and the second
paragraph on page 34 of the Company's September
30, 1996 10-Q.
99.06 The second paragraph on page 30 of the Company's
Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 1995, the fourth
paragraph on page 25 of the Company's March 31,
1996 10-Q and the third paragraph on page 34 of
the Company's September 30, 1996 10-Q.
99.07** 1996 Financial Statements of Travelers Group 401(k)
Savings Plan.
The total amount of securities authorized pursuant to any instrument defining
rights of holders of long-term debt of the Company does not exceed 10% of the
total assets of the Company and its consolidated subsidiaries. The Company will
furnish copies of any such instrument to the Commission upon request.
The financial statements required by Form 11-K for 1996 for the Travelers Group
401(k) Savings Plan were filed as an exhibit to Form 10-K/A-1 pursuant to Rule
15d-21 of the Securities Exchange Act of 1934, as amended.
Copies of any of the exhibits referred to above will be furnished at a cost of
$.25 per page (although no charge will be made for the 1996 Annual Report on
Form 10-K) to security holders who make written request therefor to Corporate
Communications and Investor Relations Department, Travelers Group Inc., 388
Greenwich Street, New York, New York 10013.
- --------
* Denotes a management contract or compensatory plan or arrangement required
to be filed as an exhibit pursuant to Item 14(c) of Form 10-K.
** Filed with Form 10-K/A-1.
*** Filed with Form 10-K/A-2.
Except as otherwise indicated, all other exhibits were filed with the initial
filing of the Form 10-K.
